Used car values have soared since the start of the pandemic, helping CarMax (KMX) more than double in price from the spring to September. If you own a vehicle that is less than five years old, you have likely received a letter from your auto dealer stating they are willing to make a lucrative offer for your automobile. With many car manufacturing plants shut down during the pandemic, the demand for used cars has increased.

Since September, though, KMX has had a series of pullbacks, most recently on Tuesday as the stock dropped 8% after the company posted fiscal third-quarter earnings that didn’t offer forward guidance amid the uncertainty of the pandemic. While the rising demand for used cars is likely to continue until the economy stops contracting, KMX’s near-term price movements look less certain. Let’s take a closer look to see if the stock is worth buying after its recent dip.

The Experts’ Take on KMX

Of the nine analysts who cover KMX, seven recommend buying, one recommends holding, and one advises selling. The average analyst price target for KMX is $120.33, indicating a potential upside of 29%. The POWR Ratings reveal KMX has an “A” grade in the Trade Grade component along with a “B” grade in the Buy & Hold Grade component. However, KMX has “C” grades in the Industry Rank and Peer Grade components. KMX is ranked fifth out of 16 stocks in the Auto Dealers & Rentals industry.

KMX’s Numbers

KMX has a forward P/E ratio of 22.96, indicating the stock is likely fairly priced around its current trading level of $93.39. However, KMX does not pay a dividend. In terms of the trading range, KMX is only about $15 below its 52-week high of $109.15. The stock is well above its 52-week low of $37.59. It is worth noting KMX dipped down to $44.27 in late March when the pandemic first began. The stock enjoyed an eye-popping upward through the summer, moving back to its pre-covid pricing. KMX returned 39.8% in 2019 and is up 46.7% over the past three years. However, the stock is down 9.7% over the past three months.

The stock has dipped 14% in September. The drop was a result of KMX’s leadership’s guidance. The combination of elevated unemployment and the pandemic made KMX’s brass somewhat uncertain about the future. The negative tone didn’t play well with investors, ultimately resulting in KMX’s autumn decline. However, KMX locations have reopened, the company has used cash on hand to pay $576 million of its revolving credit balance, and the gross profit on used vehicles has reached an impressive $2,214. 

The company reported its latest financial results on Tuesday and reported $1.42 a share, up from $1.04 a share in the same quarter last year. Total revenue increased by 8.2% year over year to $5.18 billion. Both these figures came in ahead of analyst estimates. Revenue was up due to higher-than-expected sales from the company’s wholesale vehicles segment.

Will KMX Buy Back Shares?

KMX has the authorization to buy $1.5 billion of its own stock. Though this activity is somewhat frowned upon in light of the economic recession that many argue was accelerated through corporate stock buybacks, the bottom line is KMX has the potential to buy a considerable amount of its own shares, a move that would send the price even higher, further enriching current KMX shareholders.

Buy, Sell, or Hold?

Buy or hold. KMX certainly has the potential to climb even higher in the months ahead, yet the stock has already enjoyed a rapid rise. What matters most is the buying/selling experience at KMX locations. Ask anyone who has bought or sold a vehicle at KMX about the experience, and you will be inundated with praise. KMX makes it easy to buy/sell cars and provides fair pricing, a combination that will help the company continue to capture more market share as time progresses.

Add in the fact that it will take a while for consumers to gain the confidence necessary to buy new vehicles instead of used ones, and the future looks all the more bullish for KMX. If you own KMX, consider holding onto your shares. If you do not own KMX, you could think about establishing a position during pullbacks.

Want More Great Investing Ideas?

9 “MUST OWN” Growth Stocks for 2021

5 WINNING Stocks Chart Patterns

7 Best ETFs for the NEXT Bull Market

KMX shares were trading at $93.27 per share on Wednesday morning, up $0.94 (+1.02%). Year-to-date, KMX has gained 6.39%, versus a 16.68% rise in the benchmark S&P 500 index during the same period.

About the Author: Patrick Ryan

Patrick Ryan has more than a dozen years of investing experience with a focus on information technology, consumer and entertainment sectors. In addition to working for StockNews, Patrick has also written for Wealth Authority and Fallon Wealth Management. More...

More Resources for the Stocks in this Article