Is CarMax Stock A Buy?

CarMax, Inc (NYSE:KMX) is the largest used car marketplace retailer and a component of the S&P 500. It was perfectly positioned to serve accelerating trends towards both ecommerce and used cars.

Profits hit record highs as the market reacted to the viral outbreak, but nobody knows how the economy will recover. The company did grow revenues as people move to buy used cars and that has analysts wondering is CarMax stock a buy?

In fact, used car sales outshined slumping new car sales in 2020. People made the financial decision to keep cars longer and buy them cheaper during economic uncertainty.

But that growth didn’t necessarily translate into CarMax growing as a stock. We run its VIN to see if the company can deliver returns on investor profits.

CarMax Has An Unusual Corporate History

Believe it or not, CarMax originally started as a subsidiary of defunct consumer tech retailer Circuit City. It began as an online car marketplace, and the company paid for an aggressive marketing and advertising campaign to accompany its launch.

It wasn’t long before the company was spun off into its own brand and public company. And it proved to be more profitable than its parent company – Circuit City filed for Chapter 11 bankruptcy protection in November 2008.

The company charges dealers and car brands for listing services and created a network of nearly 200 brick-and-mortar dealerships around the country.

Soon, it became the “Walmart of car sales and parts“, converting its footprint into automotive superstores. Because it operates on a massive scale, it has the capital to buy and sell vehicles wholesale and distribute them to the right markets for maximum profitability.

Now it’s the biggest used car seller in the U.S., although it has big competition taking over its lane.

Is CarMax Stock A Buy?

CarMax had a market capitalization over $15 billion at the start of 2021, corresponding to an earnings multiple of over 20x.

The company surpassed analyst earnings estimates every quarter in 2020, which was its fiscal year 2021. Net sales for its Q3 FY2021 earnings report was $5.18 billion.

Both used and wholesale vehicles grew sales volume and average selling price.

 

Net earnings for the period were $235.3 million and gross profits came out to $631.4 million for the quarter. Profit per unit rose to $3,245, and earnings per diluted share came in at $3.25 for the first nine months of the year. This is actually a nearly 20 percent decrease from the prior year because of a devastating first quarter.

Its wholesale business was the shining star though, rising double digits from the same quarter in 2019. This highlights the changing consumer car buying habits and risks of buying CarMax stock.

Is CarMax Balance Sheet Lopsided?

CarMax drove into the pandemic with $1.79 billion in debt weighing its books down, compared to $488 million cash and cash equivalents on hand. Paying this debt down to below its cash on hand is essential to protecting the company from potentially bad economic conditions and future rising interest rates.

Because it operates as both a tech company and car seller, it’s unclear where CarMax falls. Certainly it’s a popular tech stock in a world where buyers are moving increasingly online.

On the other hand, it’s also a “recovery stock” that may rise when people return to work commuting en masse. If the economy recovers, car stocks are expected to recover with them.

 

Tesla is the only major auto maker that outgrew its pre-pandemic share price ceiling.

CarMax fell right in the middle of its cohort by recovering quicker than most car companies, without ever breaking out like popular technology stocks, such as Zoom (ZM). This could make it just the right investment for conservative bulls.

But it’s not the only dealer on the online block.

CarMax Operates In A Highly Competitive Space

CarMax has competitors in the used car marketplace. Companies like AutoNation, DriveTime, Vroom, and Carvana (CVNA) all have digitally focused car sales models. While it used to be the shining new star, CarMax is now the older model. It shows too.

Unlike CarMax, Carvana grew exponentially in 2020. It crashed to $22.16 per share in March before reaching over $290.00 and settling in around $240.00 by year end.

Carvana’s car vending machine is a novel concept that gained media buzz and grew interest. Its unique buy/sell model brings curbside pickup and delivery to the car industry. Now you can buy a car without ever dealing with a human car salesman.

That distinct advantage catapulted Carvana stock over CarMax, which is ultimately just a fancy way to interact with the same old used car salesmen. If it cannot adjust, it could follow its old parent company to the corporate graveyard.

Is CarMax Stock A Buy? The Bottom Line

CarMax started under Circuit City and soon became the top selling used car seller in the United States. It outlasted its parent, but it faces a new competitor in the form of Carvana. Although CarMax share price recovered, it failed to breakout, while its rival grew exponentially to reward investors handsomely.

This highlights a shift, not just in used cars over new, but to the way people buy cars. Used car salesmen have one of the worst reputations in business. It’s a derogatory term, and Carvana proved the best thing to do is get rid of them entirely.

CarMax needs to take this seriously and adjust to fit market demand.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.