“Deteriorating market conditions, an inflated cost structure and high cash burn” are leading Wedbush analysts to foresee a darker future for used car dealers Carvana Co. CVNA.
The Analyst
Seth Basham downgraded Carvana’s rating from Outperform to Neutral while lowering its 12-month price target to $15 from $50.
The Tempe, Ariz.-based company is likely to conduct a capital raise or real estate sale in the coming months to help offset an upcoming cash shortage.
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The thesis
- Acquire adesa‘s physical auction business in the United States KAR Global CAR will weigh on the company’s growth.
- It adds $336 million in additional annual interest expense due
- It also “arms the company with additional overhaul capacity it doesn’t need.”
- Carvana’s cost base remains well above the level required to meet its near-term goal of $4,000 in SG&A per car (or unit) sold
- Wedbush forecasts a cost per vehicle of $5,500 for the fourth quarter of 2022.
- Carvana will likely need to cut costs (ie, plant closures) “to contain EBITDA losses.”
Separately, Carvana amended a financing agreement that reduced the capacity of its floor plan financing facility from $3 billion to $2.2 billion.
This will limit the company’s ability to sell more than 500,000 units per year without self-funding its inventory.
Auto dealers use floor plan financing programs that allow them to use a lender’s money to fund their inventory.
The change also weighs on the company’s liquidity as it now has to hold higher levels of cash against its borrowings.
Carvana is burning cash heavily due to Adjusted EBITDA losses, which hit $233 million in the third quarter of this year, as well as high interest payments.
“The company’s $2.5 billion in cash and equivalents in 2Q22 will decline sharply even as it relies more heavily on its floor plan funding line,” the analysts say.
Carvana will not be able to…
