Cars.com Could Be A Good Investment Now

If you are an investor in Cars.com Inc (NYSE:CARS), there are three things you should care about: (1) Why has the stock dropped a massive 53% this year (as of July 14, 2020)? (2) Can it recover from here? (3) Does the company have enough liquidity to fund its operations? Let’s start with the stock price. It fell simply because car sales tanked, especially in April 2020. Cars.com makes money primarily through a used and new car marketplace. With restrictions on movement as well as rising unemployment – there is risk that consumers will postpone any new car purchases. Where does Cars.com go from here? Well, it is just a matter of time before the demand bounces back. Once the economy stabilizes, the demand could be even bigger than before because now there is one more reason to buy a car – social distancing! Therefore, the only question remains, how strong is Cars.com financially to handle the 2020 slowdown? We assess the Impact Of The Covid-19 Recession On  Cars.com in an interactive dashboard with a focus on its cash flow generation ability. In a scenario where annual revenue falls 30%, Cars.com can still generate $134 million of free cash flow post capital expenditures. Thankfully, Cars.com is fairly strong from a financial stand point implying that it could be a good investment now if investors are willing to wait.

In 2019, Cars.com Inc. generated $-445 mil in net income on a revenue base of $607 mil. Despite this accounting loss, it managed to generate $101 mil in free cash flow from operations, and was cash flow positive even after accounting for capital expenditures and shareholder returns. So how might 2020 look? Let’s do a financial stress test to judge Cars.com’s ability to navigate this year’s economic crisis. Let’s look at a very pessimistic scenario. If for the full year, Cars.com’s revenue drops 30% to $425 million, it would imply that its net income would be somewhat similar to what it was in 2019. How so? Because of a flexible variable cost structure. It is because of this it can still manage more than $100 million in free cash flow if it can cut down capital expenditure by 50%. On top of this, the company had a cash balance of around $187 million which is sufficient to cover any burn, if it happens.

To sum things up, Cars.com could face demand pressure, but does not appear to be in the risk zone from a liquidity stand point.

While we talk about companies impacted significantly by Covid-19, don’t forget to check out our low risk high fliers portfolio. These 5 S&P 500 stocks that could turn out to be outperformers.   

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams