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Should You Invest in CarMax (KMX) Stock Before Earnings?

Wall Street expects used car retailer CarMax (KMX) to post a year-over-year decline in revenue and earnings for the second quarter. Should one invest in the stock before its earnings results are reported? Read on to learn my view…

Retail used-vehicle sales in August stood at 1.6 million, down 3.1% sequentially from the 1.75 million recorded in July. The used retail sales pace reached 18.7 million in August, down from July’s revised 20.6 million level. However, total retail used sales in the first eight months of the year have risen 4.5% year-over-year.

With new car supplies improving and interest rates at their highest level in 22 years, used car sales are expected to remain under pressure. Considering these factors and the possibility of the company reporting a year-over-year decline in revenue and earnings for the second quarter, I think avoiding fundamentally weak CarMax, Inc.’s (KMX) shares is wise.

Since the pandemic, the lack of supply of new cars due to supply chain challenges led to used car prices skyrocketing. The lack of production also meant fewer vehicles entered the used car market. This also contributed to the rise in prices of used cars. High prices and the Fed’s interest rate increases led to the affordability of used cars taking a hit.

Used cars retailer KMX is slated to publish its second-quarter results on September 28. Wall Street expects KMX’s EPS and revenue for the second quarter to decline 1.5% and 13.7% year-over-year to $0.78 and $7.03 billion, respectively. The company had surpassed the consensus EPS estimates in two of the trailing four quarters.

In the first quarter, KMX’s retail used unit sales declined 9.6% year-over-year, and its comparable store used unit sales decreased 11.4% year-over-year. Its wholesale units declined 13.6% over the prior-year quarter. The company bought 343,000 vehicles from consumers and dealers, down 5.2% year-over-year but up 31.1% sequentially.

Average selling prices of used vehicles in the first quarter stood at $27,258, down 5.5% year-over-year, while wholesale vehicle average selling prices stood at $9,024, representing a decline of 17.9% year-over-year. The company plans to open five new stores nationwide in fiscal 2024.

Cox Automotive reported that its Manheim Used Vehicle Value Index rose 0.2% sequentially to 212.2 in August, marking the lowest increase of the index in 2023. Although the index remained elevated in August, it is down 7.7% year-over-year.

Cox’s senior manager of economic and industry insights said that wholesale used vehicle prices are not expected to change through the end of the year, with tight inventories and expected sales levels likely to prevent a considerable fall in prices.

Cox expects the used vehicle wholesale market to experience a “slow and gradual recovery” in prices to pre-pandemic levels by 2028. Retail prices for consumers traditionally follow changes in wholesale prices.

KMX’s stock has declined 3.5% in price over the past three months but has increased 28.8% year-to-date to close the last trading session at $78.25.

Here’s what could influence KMX’s performance in the upcoming months:

Disappointing Financials

KMX’s used vehicle sales for the first quarter ended May 31, 2023, declined 14.4% year-over-year to $6 billion. Its wholesale vehicle sales fell 28.5% over the prior-year quarter to $1.51 billion. The company’s net sales and operating revenues decreased 17.4% year-over-year to $7.69 billion.

Its net earnings declined 9.5% year-over-year to $228.30 million. Also, its EPS came in at $1.44, representing a decline of 7.7% year-over-year.

Mixed Analyst Estimates

Analysts expect KMX’s EPS for fiscal 2024 and 2025 are expected to increase 1.4% and 25.3% year-over-year to $3.07 and $3.85, respectively. Its fiscal 2024 revenue is expected to decline 7.9% year-over-year to $27.33 billion. On the other hand, its fiscal 2025 revenue is expected to increase 4.4% year-over-year to $28.54 billion.

Mixed Valuation

In terms of forward Price/Sales, KMX’s 0.45x is 44.5% lower than the 0.82x industry average. Its 1.07x trailing-12-month EV/Sales is 4.9% lower than the 1.12x industry average.

On the other hand, in terms of forward EV/EBITDA, KMX’s 31.33x is 241.1% higher than the 9.18x industry average. Likewise, its 1.67x forward non-GAAP PEG is 26.9% higher than the 1.31x industry average. Its 25.46x forward non-GAAP P/E is 83% higher than the 13.91x industry average.

Weak Profitability

KMX’s 8.21% trailing-12-month Return on Common Equity is 26.5% lower than the 11.17% industry average. Likewise, its 1.56% trailing-12-month net income margin is 64.5% lower than the 4.40% industry average. Furthermore, the stock’s 1.57% trailing-12-month Capex/Sales is 51.1% lower than the industry average of 3.22%.

POWR Ratings Reflect Bleak Prospects

KMX has an overall D rating, equating to a Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. KMX has a C grade for Value, in sync with its mixed valuation. Its mixed analyst estimates justify its C grade for Sentiment.

It has a D grade for Quality, consistent with its weak profitability.

KMX is ranked #20 out of 23 stocks in the Auto Dealers & Rentals industry. Click here to access KMX’s Growth, Momentum, and Stability ratings.

Bottom Line

KMX is widely expected to register a decline in its revenue and EPS for the second quarter. With the Fed expected to increase the interest rates one more time by the end of the year, used cars may continue to remain less affordable.

Retailers will likely struggle to sell their inventory as used car prices remain high, which might force them to offload their current inventory below their purchasing cost, leading to margin pressure. Furthermore, UAW’s strike against the major automakers could send used car prices upwards, making them even more unaffordable as production of new vehicles takes a hit.

Given its poor fundamentals and weak profitability, it could be wise to avoid the stock now.

Stocks to Consider Instead of CarMax, Inc. (KMX)

The odds of KMX outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these stocks with A (Strong Buy) or B (Buy) ratings from the Auto Dealers & Rentals industry instead:

PT Astra International Tbk (PTAIY) Inc. (CARS)

USS Co., Ltd. (USSJY)

What To Do Next?

Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:

10 Stocks to SELL NOW! >

KMX shares were trading at $78.95 per share on Wednesday afternoon, up $0.70 (+0.89%). Year-to-date, KMX has gained 29.66%, versus a 11.91% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.


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