With the combined headwinds of skyrocketing inflation and brewing economic jitters, used-car dealership CarMax (KMX) suffered from fading investor sentiment. In the trailing year, KMX stock gave up nearly 23% of equity value, with most of the pain stemming from the tail end of the third quarter last year. However, a decent performance from its most recent earnings disclosure sent shares higher. Better yet, this enthusiasm might not be a one-off deal.
According to Zacks Equity Research, CarMax reported its fiscal Q4 2023 financial report (for the three months ended Feb. 28) Tuesday early afternoon. The company generated earnings per share of 44 cents, topping Wall Street’s consensus target of 22 cents due to “higher-than-anticipated gross profit per unit in the used and wholesale vehicle segments.” However, it’s fair to point out that this represented a steep decline from the EPS of 98 cents posted one year ago.
On the top line, CarMax posted revenue of $5.72 billion. This tally fell conspicuously short of the Street’s consensus of $5.83 billion. As well, sales contracted by 25.6% on a year-over-year basis, per Zacks.
Adding greater context to the earnings performance, CarMax’s units sold in the used-vehicles segment fell 12.6% YOY to 169,884 units. Also, the “average selling price of used vehicles fell 9.3% from the year-ago quarter to $26,598. Comparable store used-vehicle units declined 14.1%, while revenues fell 22% from the prior-year level.”
Notably, Zacks reports that “[u]sed-vehicle gross profit per unit (GPU) came in at $2,277, slightly higher than the prior-year quarter’s $2,195, topping the consensus mark of $2,136.”
Still, the focus among investors centered on the profitability beat. As a result, KMX stock shot up nearly 10%, closing at $72.21. Moreover, this positive performance might not be the last bit of good news we hear about the used-car dealership.
KMX Stock Could Potentially Rise Higher
Significantly, the Motley Fool reported that CarMax’s leadership team believes in the underlying enterprise’s upside potential. “We are confident that we are well positioned to continue leading the used car industry and to accelerate growth when the market improves,” said CEO Bill Nash in the company's earnings release.
Further, the Fool mentioned that CarMax reaffirmed its long-term targets, which it last updated in April 2022. “Those targets are to sell between 2 million and 2.4 million vehicles annually by fiscal 2026 and generate between $33 billion and $45 billion annual revenue by the same year,” stated the investment resource and news outlet.
While everyone expects corporate leaders to talk up their businesses, KMX stock distinguishes itself through a credible backdrop. Essentially, the underlying social fundamentals bode well for the used-car dealership.
First, Reuters noted late last year that a recession in 2023 could see remote workers return to pre-pandemic workplace norms. As evidence, the news agency cited government data that showed subway use in New York City increased in wealthier and business districts last year, indicating that more white-collar workers were returning to the office. Plus, as layoffs rise, more people will compete to keep their jobs, which means showing up and being counted.
However, many folks living in the western side of the nation often have little choice but to commute in their personal vehicles. Therefore, mileage may increase substantially, leading to greater demand for replacement cars.
In addition, combustion-powered cars aren’t meant to be stationary for long periods of time. With millions of remote workers dramatically reducing their vehicular use, this could impose greater mechanical strain as critical fluids fail to circulate throughout the automotive system. Cynically, then, KMX stock could swing higher over time as vehicles break down quicker than expected.
A Contrarian Opportunity
To be clear, no one should be under any illusion: buying KMX stock represents a risky endeavor and goes contrary to conventional wisdom. For example, the Barchart Technical Opinion indicator rates KMX as a 16% sell, warning readers about its weakening short-term outlook.
Also, analysts’ opinions don’t offer the most enthusiastic framework. In the current month, KMX stock rates as a consensus moderate buy. However, the individual assessments are all over the map: five strong buys, two moderate buys, six holds, one moderate sell and one strong sell.
Per TipRanks’ coverage of analysts rating KMX stock within the past three months, the consensus is a hold: three buys, three holds and two sells. Further, the experts’ average price target is $59.63, implying more than 17% downside risk.
Nevertheless, with society gradually normalizing, traffic volume will likewise reach pre-pandemic norms, if not greater. Therefore, KMX stock could be a surprisingly robust contrarian opportunity.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
