Carvana is on watch after S&P boosted its credit rating by a notch (NYSE:CVNA)

Standard & Poor’s Global has upgraded Carvana’s credit rating to A+.NYSE: CVNA) to B- from CCC+. The rating agency noted that Carvana (CVNA) has continued to grow revenue and earnings. Standard & Poor’s sees these improvements as sustainable and enabling meaningful free earnings. Operating cash flow.

The rating upgrade was tied to Carvana’s fundamental improvements to its business, which S&P believes will support stronger EBITDA margins and positive operating free cash flow. Crucially, Carvana (CVNA) significantly improved its economics per unit of retail vehicles sold, increasing retail net profit per unit to $3,539 in Q2 2024 from $2,862 a year earlier. The company also increased units sold to 101,400 in Q2 2024, up 33% from the same period a year earlier. At the same time, Carvana (CVNA) reduced operating costs, improved remanufacturing, reduced inventory turnover, and increased ancillary revenue to achieve these stronger unit economics.

S&P’s outlook for Carvana (CVNA) includes expectations that it will continue to grow unit sales, while remaining disciplined in controlling costs to further expand EBITDA and cash flow.

“We expect revenue to grow approximately 20% through 2024, primarily due to increased unit sales and loans due to increased loans, offset by a slight decline in price per unit as used vehicle prices moderate. We expect retail GPU growth to slow as unit sales expand as inventories increase and delivery times normalize. However, we believe Carvana can leverage its SG&A. Despite the significant reduction in SG&A spending, the company is still far from achieving its longer-term goal of achieving 6% to 8% SG&A as a percentage of revenue. The company currently has sufficient production and fulfillment infrastructure to triple retail volumes, which would result in significant overhead and lower SG&A as a percentage of revenue.”

S&P also issued a stable outlook on Carvana (CVNA), reflecting the view that the auto retailer will continue to grow EBITDA, generate positive free operating cash flow, and maintain leverage of approximately 6X to 7X over the next 12 months.