Should investors kick the tires on CarMax stock?
CarMax (NYSE:KMX) was riding high on Friday after the used car sales company posted strong first quarter earnings.
CarMax stock rose about 9% at the opening bell following its pre-market earnings release in which CarMax beat earnings and revenue estimates.
The company generated revenue of $7.55 billion in the quarter, a 6% increase year-over-year. It was slightly ahead of estimates of $7.54 billion.
Revenue gains were fueled by a 9% year-over-year increase in car unit sales to 230,210, with the average selling price down 1.5% to $26,120. Same store sales rose a robust 8.1% in the quarter.
Overall gross profit increased 12.8% to $893 million, with used car sales seeing an 11.8% increase in sales. Gross profit is the amount of income after subtracting sales costs, that is, the cost of producing/acquiring the vehicle and selling it.
Net earnings were $210.4 million, or $1.38 per share, which marked a 42% year-over-year increase. It also topped Wall Street estimates of $1.19 per share.
“We delivered our fourth consecutive quarter of positive retail comps and double-digit year-over-year earnings per share growth. These results highlight the strength of our earnings growth model, which is underpinned by our best-in-class omni-channel experience, the diversity of our business, and our sharp focus on execution,” Bill Nash, president and CEO, said.
Surge in pre-tariff sales
As a used car seller, CarMax buys the vehicles it sells from consumers and other car dealers. In the first quarter, CarMax acquired 336,000 vehicles — an increase of 7.2%. Of that amount, 288,000 vehicles were purchased from consumers, up 3.3%, while 48,000 vehicles were purchased through dealers, up 38.4%.
For a lot of retailers, excess inventory is considered a negative, but that is not the case with CarMax. More inventory gives customers a broader selection of cars to choose from. On top of that, used car sales are expected to be strong for several reasons – tariffs on new cars, affordability, and economic uncertainty, to name a few. So it will be necessary to have more cars to meet the demand.
Also to meet the demand, CarMax has expanded its non-prime auto financing program to increase its penetration and grow its financing income. In the first quarter, it financed 41.8% of its cars sold, down from 43.5% in the same quarter a year ago. The reduction in penetration was primarily driven by an influx of self-funded, higher credit purchasers seen during the initial announcement of tariffs.
While the earnings report didn’t break out sales in each month of the quarter that ended May 31, the recent May retail sales report provides some insight.
In May, motor vehicles saw $152 billion in sales. That dropped to $147 billion in April and $145 billion in May. So, the March sales spike before the tariffs kicked in likely provided a boost for CarMax.
Is CarMax stock a buy?
CarMax stock shot up 9% at the opening bell but then settled back down to about a 5% gain, trading at around $68 per share. The stock remains down about 20% year-to-date and 8% over the past year.
The valuation has dropped, as the stock now has a P/E ratio of 20 and a forward P/E of 17, which are below the S&P 500 average.
The consensus price target among analysts is $80 per share, which would suggest a 14% return over the next 12 months. Given the robust outlook for used car sales, and the stock’s discounted value, it may not be a bad time to kick the tires on CarMax stock.
