“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, September 10, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

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Option Trade – Carvana Co (NYSE: CVNA) Calls

 Thursday, September 13, 2018

** OPTION TRADE: Buy the CVNA OCT 19 2018 70.000 CALL at approximately $4.00 TO $4.20. Place a pre-determined sell at $8.00.

Also include a protective stop loss of $1.60.

Carvana Co (NYSE: CVNA), an eCommerce platform, which engages in the buying of used cars and provision of different and convenient car buying experience, saw its revenue skyrocket 127% in its latest quarter, blasting through analyst expectations of a 103% burst. Sales have more than doubled in each of Carvana's seven quarters as a public company.

Carvana sold 111% more vehicles than it did a year earlier. Expansion is playing the starring role, here, as the used car speedster now has a presence in 75 different markets -- and just 13 of them feature the iconic eight- or nine-story glass-enclosed vending machine that spits out cars as they are purchased.

What is Carvana Co?

Buying a used car is no longer a daunting experience for shoppers. Carvana has softened the hard sell, streamlined the process, and electrified the entertainment value of the delivery. Carvana's signature multistory automobile vending machines generate buzz and visual branding, but at its heart, this is the fastest-growing auto retailer in the country.

The tech- and consumer-centric initiatives these glass houses Carvana is doing to raise the bar on the once-dreaded car-buying experience is a positive.

Past Earnings…..

Carvana delivered a strong second quarter to investors on August 8, 2018, with explosive growth figures compared to the prior year in many financial metrics.

The company put double-digit increases to shame with retail units sold increasing 111%, compared to the prior year's 22,570 units. Total revenue was similar, with a 127% increase to $475.3 million. This result wasn't one-of-a-kind, either: through the first-half of 2018, Carvana is on pace to track its fifth consecutive year of triple-digit revenue growth.

Total gross profit's jump was even more impressive, at 206%.

Carvana's growth wasn't limited to its financials. The company recorded a 142% growth in monthly unique visitors (MUV) to its website. Comparing its 142% MUV growth to its 111% retail growth, it suggests that demand and interest for its online services outstrips its supply.

Moving Forward…..

On Monday, Carvana announced plans to raise capital to fund its expansion efforts. The innovative e-commerce-oriented used car retailer said that it expects to offer $300 million in five-year notes, with the intent of using the proceeds of the sale for general corporate purposes. Carvana has worked hard to expand its network of locations, and sales more than doubled in its most recent quarter compared to year-earlier results.

Influencing Factors…..

During the second quarter, Carvana launched nine new markets, making its total 65 as of June 30, 2018.

What's more, two of those markets were in significant population areas: New York City and the San Jose bay area. That had an impact on the U.S. population Carvana serves with its markets; at the end of the first quarter of 2018, it reached 45.8%, which moved up significantly to 52.8% at the end of the second quarter.

A Carvana commercial showed the coin-operated vending machine delivery for the first time as it pushed national advertising. During that advertising push, it opened four of its signature vending machines in Charlotte, Washington, D.C., Orlando, and Phoenix.

Carvana secured a site near Indianapolis, Indiana, for its fifth inspection and reconditioning center (IRC), and construction has already started. This will expand on the company's ability to inspect and recondition units by 50,000 vehicles a year capacity. Beyond adding capacity, this move will also help the company cut down its transportation distance from acquiring a vehicle, inspecting it, and redistributing it for retail for its midwestern markets -- a glance at the footprint below will show how an Indianapolis IRC will help fill a gap in the Midwest.

Moving Ahead…..

Currently, Carvana generates most of its business selling used vehicles, but that leaves opportunity for the company to grow and expand its business model. Management noted that it's focusing more on creating a better way for consumers to sell or trade a car, in addition to its legacy business of selling used cars to consumers. The young business segment is still in early development, but management was optimistic about results in the second quarter. Carvana's vehicles purchased directly from consumers, rather than at wholesale auctions, for example, increased 264% compared to the prior year's result, and 92% compared to the first quarter of 2018.

Analysts and Hedge Funds Opinions

In a report released Tuesday, Sameet Sinha from B.Riley FBR maintained a Buy rating on Carvana, with a price target of $76. Sinha wrote:

Monday pre-market (9/10), Carvana Co. (CVNA) announced plans to raise $300M in senior unsecured notes due in 2023. We believe it is likely the company will use the proceeds to continue to build out new geographies. The critical element of yesterday’s filing was additional data on market profitability by cohort, which indicates that more markets are more profitable than expected and newer markets are getting to profitability faster than old ones. Management also elaborated on the need for $150M-$200M in annual capex due to market growth, which is in line with our expectation of $170M/$180M in 2018/2019. We believe this debt raise will close the $200M in funding gap that we estimated, before the company reaches cash flow breakeven.”

Also this week, Citigroup analyst Mark May maintained a Buy rating on Carvana Co and set a price target of $77. Citigroup’s price target indicates a potential upside of 12.77% from the company’s previous close. The analysts noted that the move was a valuation call.

Shares of Carvana have received a consensus rating of “Buy” from the fifteen analysts that are currently covering the stock. One research analyst has rated the stock with a sell rating, four have assigned a hold rating and ten have given a buy rating to the company.

Summary

With just 65 traditional locations and 12 of its popular vending machines, Carvana has plenty more room to grow, and this debt offering will give it the cash to do so without diluting current shareholders.

The company continues to expand its vision of changing the way people buy cars without a traditional dealership and replacing it with an online retail platform and delivery or pick-up options. Right now, business is good.

Carvana has a 1 year low of $12.17 and a 1 year high of $68.34. The company has a debt-to-equity ratio of 0.29, a quick ratio of 0.78 and a current ratio of 1.47. The stock has a market capitalization of $8.61 billion, a price-to-earnings ratio of -56.43 and a beta of -1.37.






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