Used vehicles retailer CarMax, Inc. (KMX) operates through the two broad segments of CarMax Sales Operations and CarMax Auto Finance. The company’s offerings include models of used vehicles, reconditioning and vehicle repair services, and financing alternatives.

KMX’s stock rose in pre-market trade after its earnings topped expectations in its fiscal first quarter. Analysts expected a $1.49 EPS on $9.06 billion sales, which the company topped with a $1.56 EPS on $9.31 billion sales. On the other hand, the company’s vehicle sales stood at 427,257, down 5.5% from the prior-year quarter.

Over the past year, the stock has declined 30.8% and 28.8% year-to-date to close its last trading session at $92.67. However, it has gained 2.4% intraday.

Here are the factors that could affect KMX’s performance in the near term:

Declining Bottom Line

For the fiscal first quarter ended May 31, KMX’s net sales and operating revenues increased 21% year-over-year to $9.31 billion. However, net earnings decreased 42.2% from the prior-year quarter to $252.27 million. Net EPS declined 40.7% from the same period the prior year to $1.56.

Narrow Profit Margins

KMX’s trailing-12-months gross profit margin, EBITDA margin, and net income margin of 11.49%, 4.64%, and 2.77% are 68.5%, 61.7%, and 57.5% lower than their respective industry averages of 36.51%, 12.11%, and 6.52%. Its trailing-12-months ROTC and ROA of 3.68% and 3.67% are 48.1% and 33.8% lower than their respective industry averages of 7.10% and 5.54%.

Bleak Bottom Line Expectations

The consensus EPS estimates of $1.42 and $1.34 for the quarter ending August and November 2022 indicate a 17.4% and 17.8% year-over-year decrease. Moreover, Street EPS estimate for the fiscal year 2023 of $5.77 reflects a decline of 17.2% from the prior year.

Stretched Valuations

In terms of its forward non-GAAP P/E, KMX is trading at 16.45x, 47.4% higher than the industry average of 11.16x. The stock’s forward EV/EBITDA multiple of 21.48 is 166.3% higher than the industry average of 8.07. In terms of its forward EV/EBIT, it is trading at 26.05x, 132.7% higher than the industry average of 11.20x.

POWR Ratings Reflect Bleak Prospects

KMX’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

KMX has a Sentiment and Quality grade of D in sync with its unfavorable EPS expectations and bleak profitability margins.

In the 24-stock Auto Dealers & Rentals industry, it is ranked #22.

Click here to see the additional POWR Ratings for KMX (Growth, Value, Momentum, and Stability).

View all the top stocks in the Auto Dealers & Rentals industry here.

Bottom Line

Despite its better-than-expected result in the last reported quarter, KMX’s bottom line position is concerning. Moreover, its vehicle sales have declined on a year-over-year basis. Also, analysts expect further declines in its EPS in the coming quarters. And since the stock is trading below its 50-day and 200-day moving averages, I think KMX might be avoided now.

How Does CarMax, Inc. (KMX) Stack Up Against its Peers?

While KMX has an overall POWR Rating of D, one might consider looking at its industry peers, Rush Enterprises, Inc. (RUSHA) and Penske Automotive Group, Inc. (PAG), which have an overall A (Strong Buy) rating, and USS Co., Ltd. (USSJY) and Sonic Automotive, Inc. (SAH), which have an overall B (Buy) rating.

KMX shares were trading at $92.67 per share on Monday morning, up $2.19 (+2.42%). Year-to-date, KMX has declined -28.84%, versus a -19.14% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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