Carvana Co. (CVNA) and CarMax Inc. (KMX) are two of the world’s leading used-car retailers. CVNA is primarily an e-commerce platform for buying and selling used cars. The platform allows consumers to choose a vehicle after inspecting it with the help of the company’s proprietary 360-degree vehicle imaging technology. KMX is mainly a retailer of used vehicles and operates through two segments — CarMax Sales Operations and CarMax Auto Finance (CAF).
Because people are wary of using public transport for fear of coronavirus contagion, the demand for personal vehicles is on the rise. And since used cars are cheaper than new ones, both CVNA and KMX have been seeing significant demand.
While CVNA has returned 1209.3% over the past three years, KMX has gained 47.5%. In terms of year-to-date performance, CVNA is a clear winner with 172% returns versus KMX’s 7.9%. But which of these two stocks is a better pick now? Let us find out.
Throughout this month, Phoenix, Arizona-based CVNA has been offering as-soon-as next-day vehicle delivery in Pine Bluff, the Hot Springs area, and in Little Rock. Customers can inspect more than 20,000 vehicles on the company website, and finance, purchase, and sell or trade their current vehicle on the site. CVNA now offers as-soon-as-next-day vehicle delivery in 264 markets across the United States. The company started offering the as-soon-as-next-day touchless home delivery to Harrisonburg area residents on November 23.
On November 18, the company opened its flagship Car Vending Machine in Atlanta. All its vehicles come with a seven-day return policy. CVNA announced on October 24, that it will be the primary partner of seven-time NASCAR Cup Series (NCS) Champion Jimmie Johnson and Chip Ganassi Racing (CGR) for the 2021 NTT INDYCAR SERIES racing season in a newly formed Carvana Chip Ganassi Racing entry.
Carmel, Indiana-based recently announced a new partnership with the NBA, WNBA, and Turner Sports. As part of the multiyear agreement, KMX is now the official auto retailer of the NBA and WNBA, as well as the presenting partner of NBA Tip-Off on TNT. On September 24, the company announced the completion of its omni-channel rollout, which delivers to it the largest addressable market in the used car industry.
Recent Financial Results
CVNA’s revenue has surged 41% year-over-year to $1.5 billion for the third quarter ended September 30, 2020. Retail units sold have increased 38.8% year-over-year to 64,414. And its gross profit increased 90% year-over-year to $261.3 million, while total gross profit per unit (GPU) increased 36.9% year-over-year to $4,056. Vehicles purchased directly from customers have increased 128% year-over-year.
KMX’s sales and operating revenues from wholesale vehicle sales for the fiscal third quarter ended November 30, 2020 have increased 35.6% year-over-year to $828.4 million. Gross profit increased 3% year-over-year to $631.4 million. CarMax Auto Finance (CAF) income increased 54.7% year-over-year. And its net earnings have increased 35.9% year-over-year to $235.3 million, while EPS increased 36.5% year-over-year to $1.42.
Past and Expected Financial Performance
CVNA’s revenue has grown at a CAGR of 90.8% over the past three years. The market expects the company’s revenue to increase 44.1% for the current quarter ending December 31, 2020, 35.9% in the current year, and 53.1% for the quarter ending March 31, 2021. CVNA’s EPS is expected to grow 57.6% for the quarter ending March 2021, and 44.1% in 2021.
On the other hand, KMX’s revenue grew at a CAGR of 3.5% over the past 3 years. The market expects KMX’s revenue to increase 4.4% for the current quarter ending February 2021, 106.4% for the quarter ending May 2021, and 16.9% in 2022. The company’s EPS is expected to grow 5100% for the quarter ending May 31, 2021, and 26.7% in 2022.
Thus, CVNA has an edge over KMX here.
KMX’s trailing-12-month revenue of $19.88 billion is much more than CVNA’s. Moreover, KMX is slightly more profitable with a gross margin of 14.6% versus CVNA’s 14.3%.
Also, KMX’s ROE and ROA of 19.21%, and 3.23%, respectively, compare favorably with CVNA’s negative values.
In terms of forward P/E, KMX is currently trading at 21.63x, which is much more expensive than CVNA. However, KMX is less expensive both in terms of trailing-12-month P/S (0.78x versus CVNA’s 3.05x), and trailing-12-month EV/S (1.54x versus CVNA’s 3.97x).
In terms of trailing-12-month price to book as well, KMX’s 3.74x is lower than CVNA’s 41.02x.
Both CVNA and KMX are rated “Buy” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for CVNA and KMX:
CVNA has an “A” for Trade Grade and Industry Rank, and a “B” for Buy & Hold Grade, and a “C” for Peer Grade. It is currently ranked #19 of 61 stocks in the Internet industry.
KMX holds an “B” for Trade Grade and Buy & Hold Grade, and a “C” for Peer Grade and Industry Rank. It is currently ranked #7 of 16 stocks in the Auto Dealers & Rentals industry.
Both CVNA and KMX are good investment bets considering their market dominance and continued expansion. However, CVNA appears to be a better buy based on the factors discussed here. In particular, its revenue and EPS growth expectations should help it perform better than KMX.
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CVNA shares were trading at $243.71 per share on Thursday afternoon, down $6.63 (-2.65%). Year-to-date, CVNA has gained 164.76%, versus a 17.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...
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