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RBC Capital Markets thinks it’s time to sell Carvana even after its recent earnings beat. Analyst Brad Erickson downgraded Carvana to underperform from sector perform, saying any upside from the online auto retailer’s better-than-expected second-quarter results is more than priced in. “CVNA’s better Q2 results, debt restructuring & newly enabled access to equity capital reduced liquidity risks once again – a big positive for the stock. With that said, sticking to fundamentals, we move to Underperform,” Erickson wrote Thursday. “We believe LT margin improvements are now likely well/ overly-appreciated, a faster (potentially margin-stalling) return to growth is likely necessary to cover debt costs and significant dilution & expanding debt load post-restructure are likely coming,” Erickson added. CVNA 1D mountain Carvana shares 1-day The downgrade comes after the company’s earnings results on Wednesday topped estimates on the top and bottom lines. Carvana reported a loss of 55 cents per share, lower than $1.15 per share expected by analysts polled by Refinitiv. Revenue came in at $2.97 billion, greater than the $2.59 billion expected. The firm also announced a debt restructuring agreement that would lower the retailer’s total debt outstanding by more than $1.2 billion. However, after Carvana’s run up this year, the analyst said a return growth would come with more “inefficiencies” including the need for more vehicles, more labor and more marketing. The analyst raised his price target to $30 from $9. However, that still represents a fall of more than 46% from Wednesday’s close of $55.80 per share. The stock rose 2% in Thursday premarket trading. “We believe a return to retail unit growth could stall or even reverse the progress made to operating leverage. We estimate the company’s current 300k retail unit run rate could roughly generate $300-$500M of EBITDA at scale relative to the estimated $9.5B the company has to pay in debt principal & interest over the next 8 years – thus the need for growth,” Erickson said. “With that said, we’d think a return to growth could also be accompanied by inefficiencies across areas like vehicle acquisition, transportation/logistics, hiring/labor, physical capacity utilization and increased advertising – all of which are vital to driving long-term profitability,” he added. —CNBC’s Michael Bloom contributed to this report.
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