How Carvana convinced this former bear to change his tune on the stock

By Emily Bary

Jefferies is no longer bearish in light of operational progress at the online car retailer

Credit where credit is due: Carvana Co.'s recent "operational adjustments" seem to be paying off.

That's according to Jefferies analyst John Colantuoni, who ended his bearish call on Carvana shares (CVNA) in a Tuesday morning report. While Colantuoni once worried that Carvana's unit economics would face trouble early this year, he now thinks the company's work to lower retail reconditioning and transportation costs has put the online car seller in a better spot.

Carvana guided for a fourth consecutive record high in retail gross profit per unit when it delivered upbeat results last month. The outlook suggests to Colantuoni that the company's operational improvements have fueled "sustainable improvements to unit economics."

In light of that progress, Colantuoni has upped his projections for free cash flow and earnings before interest, taxes, depreciation and amortization. Assuming that retail gross profit per unit stays roughly the same, he boosted his 2025 gross profit expectations by 15%, something he said drives his 2025 Ebitda expectations 80% higher.

Additionally, Colantuoni now sees a lower risk that the company will face a cash crunch.

"We see early evidence [Carvana] is transitioning to a self-financed enterprise, capable of using cash from operations to fund growth and outstanding debt," Colantuoni wrote. His model assumes a "relatively stable" cash position for Carvana between 2026 and 2031, even as he projects the company will use cash on hand "to finance four substantial principal payments during that period."

Carvana's progress on the cash front minimizes the chances that the company will need to raise equity and dilute current shareholders, he added.

Colantuoni raised his rating on Carvana shares to hold from underperform, noting that he's declining to take a more positive stance for now due to the risk that unit economics could face pressure once the company accelerates its growth.

He upped his price target to $85 from $30 in his latest note while joining a sizable contingent of sidelined analysts. Of the 22 tracked by FactSet who cover Carvana shares, two have buy-equivalent ratings, 16 have neutral-equivalent ratings and four have sell-equivalent ratings.

Carvana shares are up more than 2% in Tuesday morning action, bringing their year-to-date rally to just above 50%.

Also read: How Carvana caused a Wall Street whiplash

-Emily Bary

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03-12-24 0946ET

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