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Carvana's (CVNA) Shares Surge on Debt Deal With Bondholders
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Before 2023, Carvana Co.’s (CVNA - Free Report) stock was on a steady slide since peaking in 2021. During the pandemic, a chip crunch in the new car market ensured that customers opted for readily available used cars, and the company benefited from this.
However, when a semblance of normalcy returned to the markets, Carvana found it difficult to sell its heavily priced used cars, with demand hitting bottom. Over the past two years, elevated levels of inflation and an overhanging fear of recession deterred buyers from paying such prices, especially for used cars.
The embattled online used-car seller, which is part of the Zacks Internet - Commerce industry, lost almost 87% of its value in these two years, reducing to a $7.5 billion market-cap company. There have been legitimate concerns about the company’s financial health as the slump in vehicle demand have coincided with a $2.2 billion debt-funded deal to buy auto auction house Adesa.
Financials Show CVNA on the Right Track
Carvana, however, has started staging a comeback. CVNA, which at one stage was looking at possible bankruptcy, has given an upbeat earnings outlook for 2023. Carvana reported 55 cents loss per share in the second quarter, narrower than the Zacks Consensus Estimate of a loss of $1.13 and the year-ago loss of $2.35. The company posted revenues of $2.97 billion, surpassing the Zacks Consensus Estimate by 13.18%.
The Zacks Consensus Estimate for its current-year earnings has improved 4.9% over the past 60 days, indicating a year-over-year increase of 37.8%. Year to date, CVNA’s share price has risen a mind-boggling 1077.2% compared to 36.4% growth for the Internet – Commerce industry.
CVNA Shares Skyrocket on Debt Reduction Deal
On Jul 19, Carvana’s shares shot up 40.2% after it announced a deal with its term bondholders to reduce debt by $1.2 billion, following its big sales beat. As this deal comes to fruition, it will address the company’s liquidity issues. As of June, Carvana had a long-term debt of $6.5 billion.
In recent months, CVNA has been trying to strengthen its balance sheet by cutting down on inventory, advertising expenses and selling auto loans. This latest debt agreement will help the company get rid of more than 83% of its unsecured notes maturing in 2025 and 2027 and lower required cash interest expense by over $430 million/year for the next two years.
"This transaction significantly increases our financial flexibility by reducing our total debt, extending maturities, and lowering near-term cash interest expense as we continue to execute our plan of driving significant profitability and returning to growth," CFO Mark Jenkins said in a statement made to the press.
Zacks Rank & Competition
Carvana, which currently carries a Zacks Rank #2 (Buy), looks set to rise from the slump it has found itself in. Whether it matches up to its peers, such as TrueCar, Inc. (TRUE - Free Report) and Cars.com Inc. (CARS - Free Report) , remains to be seen. Both companies have a positive sales and earnings outlook for the year.
Carvana had a rough 2022. However, an end-to-end business model, well thought out acquisitions and improving financials bode well for long-term growth. That is why its share price has been rising through 2023. Also, this latest debt reduction agreement helps to resolve a lot of questions that have been asked about the company’s financial health.
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Carvana's (CVNA) Shares Surge on Debt Deal With Bondholders
Before 2023, Carvana Co.’s (CVNA - Free Report) stock was on a steady slide since peaking in 2021. During the pandemic, a chip crunch in the new car market ensured that customers opted for readily available used cars, and the company benefited from this.
However, when a semblance of normalcy returned to the markets, Carvana found it difficult to sell its heavily priced used cars, with demand hitting bottom. Over the past two years, elevated levels of inflation and an overhanging fear of recession deterred buyers from paying such prices, especially for used cars.
The embattled online used-car seller, which is part of the Zacks Internet - Commerce industry, lost almost 87% of its value in these two years, reducing to a $7.5 billion market-cap company. There have been legitimate concerns about the company’s financial health as the slump in vehicle demand have coincided with a $2.2 billion debt-funded deal to buy auto auction house Adesa.
Financials Show CVNA on the Right Track
Carvana, however, has started staging a comeback. CVNA, which at one stage was looking at possible bankruptcy, has given an upbeat earnings outlook for 2023. Carvana reported 55 cents loss per share in the second quarter, narrower than the Zacks Consensus Estimate of a loss of $1.13 and the year-ago loss of $2.35. The company posted revenues of $2.97 billion, surpassing the Zacks Consensus Estimate by 13.18%.
The Zacks Consensus Estimate for its current-year earnings has improved 4.9% over the past 60 days, indicating a year-over-year increase of 37.8%. Year to date, CVNA’s share price has risen a mind-boggling 1077.2% compared to 36.4% growth for the Internet – Commerce industry.
CVNA Shares Skyrocket on Debt Reduction Deal
On Jul 19, Carvana’s shares shot up 40.2% after it announced a deal with its term bondholders to reduce debt by $1.2 billion, following its big sales beat. As this deal comes to fruition, it will address the company’s liquidity issues. As of June, Carvana had a long-term debt of $6.5 billion.
In recent months, CVNA has been trying to strengthen its balance sheet by cutting down on inventory, advertising expenses and selling auto loans. This latest debt agreement will help the company get rid of more than 83% of its unsecured notes maturing in 2025 and 2027 and lower required cash interest expense by over $430 million/year for the next two years.
"This transaction significantly increases our financial flexibility by reducing our total debt, extending maturities, and lowering near-term cash interest expense as we continue to execute our plan of driving significant profitability and returning to growth," CFO Mark Jenkins said in a statement made to the press.
Zacks Rank & Competition
Carvana, which currently carries a Zacks Rank #2 (Buy), looks set to rise from the slump it has found itself in. Whether it matches up to its peers, such as TrueCar, Inc. (TRUE - Free Report) and Cars.com Inc. (CARS - Free Report) , remains to be seen. Both companies have a positive sales and earnings outlook for the year.
TrueCar and Cars.com currently carry a Zacks Rank #2 (Buy) and 3 (Hold), respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Bottom Line
Carvana had a rough 2022. However, an end-to-end business model, well thought out acquisitions and improving financials bode well for long-term growth. That is why its share price has been rising through 2023. Also, this latest debt reduction agreement helps to resolve a lot of questions that have been asked about the company’s financial health.