Headquartered in Virginia, CarMax (KMX) operates a retail store chain and an online platform that sells used motor vehicles. I am bullish on the stock.
In the used car business, several major challenges are present in 2022. The first one is high inflation, which makes it more difficult for shoppers to be able to afford a vehicle. Another problem is rising interest rates, as this will increase borrowing costs, which tends to dis-incentivize car purchases.
Additionally, the looming threat of a recession is top-of-mind for some shoppers, so they might choose to save their money instead of buying a vehicle now. They might even choose to carpool, share a car with a spouse, or just take public transportation instead of purchasing a used car.
Amid this difficult backdrop, CarMax somehow has to demonstrate its viability as a business. The company’s CEO acknowledged that there are challenges in the used-car market, but CarMax’s just-released results should provide encouragement and, possibly, convince you to buy a few shares.
On TipRanks, KMX scores a 6 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to perform in-line with the broader market.
Max Pain for CarMax Investors
Like many other stocks related to e-commerce, CarMax stock has declined sharply since late last year. Painfully, the share price fell from $155.98 in November 2021 to just $92 recently. The good news here is that CarMax’s trailing 12-month P/E ratio is 13.16, which is quite reasonable and suggests that the shares are a bargain.
Beyond the general weakness in e-commerce stocks during the past half-year, Needham analyst Chris Pierce observed a separate challenge presented by the Federal Reserve. Noting the “headwind that interest rates will be higher,” Pierce nonetheless pinpointed CarMax as “the gold standard in the fragmented used vehicle retailing industry” and assigned the company’s stock a Hold rating.
The point about interest rates is duly noted, and some traders might be reluctant to jump into the trade with CarMax stock. After all, even CarMax President and CEO Bill Nash has admitted that the “the used vehicle market environment was challenging in the first quarter.”
However, if any used vehicle retailer is up to the challenge, it’s CarMax. The company was ahead of the curve in deploying an omni-channel strategy involving both in-person sales and e-commerce. Today, CarMax has over 220 locations throughout the U.S. It’s a huge company with a vast market presence – but the question still remains about whether CarMax can produce the financial results that investors are looking for in 2022.
A Slew of Challenges
Leading up to CarMax’s first-quarter fiscal 2023 data release, it looked like the experts were preparing for mixed but mostly disappointing results. In particular, analysts surveyed by FactSet had anticipated that CarMax would report a 19% year-over-year increase in revenue to $9.124 billion.
That might sound optimistic, but the analysts also braced for CarMax to post a 42% drop in earnings, to $1.53 per share. Also, the analysts pessimistically prepared for the company to report a 11.6% decline in same-store sales, after CarMax had already announced a 6.5% reduction the previous quarter.
So, did the actual results put CarMax in the driver’s seat? Starting with the top line, CarMax’s net revenue of $9.3 billion beat the Street and represented a 21% year-over-year improvement. Thus, we’re off to a good start.
CarMax also reported quarterly earnings of $1.56 per share, again surpassing the analyst community’s expectations. On the other hand, CarMax’s comparable-store used unit sales declined 12.7% year over year, so that could be considered a miss.
Before you decide to throw in the towel on CarMax stock, consider that the company is dealing with a slew of challenges. The company cited inflation and “waning consumer confidence,” along with the “lapping of stimulus benefits paid in the prior year period.” Despite all of these problems, CarMax’s total retail used-vehicle revenue increased 13.9% year over year.
Moreover, CarMax observed that the average retail selling price in Q1 FY2023 increased by approximately $6,300 per unit. This would certainly have deterred some shoppers from choosing to buy a used car. Perhaps if used-vehicle prices ease back in the coming months, more people will use CarMax’s platform to make a purchase.
Looking to the future, CarMax’s CEO made an intriguing statement, saying, “All of our retail customers are now able to transact online on their own. We will now turn our efforts to further improving the experience for customers and associates by focusing on the seamlessness of our online and in-store offerings.” Nash seems to be suggesting that CarMax will be more proactive in enhancing the customer experience. So, investors should stay on the lookout for developments in that regard.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, KMX is a Moderate Buy, based on six Buy and five Hold ratings. The average CarMax price target is $117.78, implying 19.74% upside potential.
The Takeaway
Suffice it to say that CarMax’s recently issued results weren’t perfect, but they were pretty good considering the circumstances. Plus, it will be interesting to see what the company does in the near future to improve the car-shopping experience.
Sure, it’s risky to invest in a used-vehicle retailer when prices are elevated. Nevertheless, CarMax’s resilience might surprise you and if you’re not afraid of a bumpy ride, feel free to get behind the wheel and give low-priced CarMax stock a try.
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