CarMax (KMX) earnings did nothing to assure investors that it can boost sales amid heightened competition and too much inventory, and that pressured KMX stock once again.
True, CarMax delivered record earnings per share that exceeded Wall Street forecasts, but KMX is pursuing growth by opening new stores, and its revenue came in light.
As a used-car dealer, the industrywide growth in sales of new vehicles is not particularly good news for CarMax stock. (KMX also sells new cars, but the used segment accounts for the great majority of revenue.)
At any rate, pent-up demand for new cars has fewer drivers opting for used rides, and that’s giving CarMax trouble with too much inventory. When inventory builds up, a company is forced to cut prices to move it, and that’s what’s hitting earnings and, by extension, CarMax stock.
For the most recent period, CarMax earnings came to $172 million, or 82 cents a share — up from $155 million, or 70 cents a share, in last year’s second quarter.
After stripping out a benefit of 3 cents a share, CarMax earnings of 79 cents topped analysts’ average estimate of 76 cents, according to a survey by Thomson Reuters.
The top line was less impressive. Revenue increased to $3.88 billion, which was significantly short of the estimate for $3.96 billion.
KMX Needs Margin Expansion
That sales shortfall came despite the investments CarMax is making in expanding its footprint. The company opened four stores over the course of the quarter, one of which was in a new market.
In a less savvy move, CarMax opened its sixth store in Houston, which is reeling from the collapse in oil prices. On Monday we learned that homebuilder Lennar (LEN) enjoyed sales growth in every region except Houston.
Top-line headwinds have the market looking down on CarMax stock. After all, shares tumbled even though CarMax earnings beat Wall Street estimates. KMX stock is now off 10% for the year to date, and it’s hard to see any catalysts on the horizon.
Click to Enlarge Adding to concerns, the technicals don’t look all that good either. KMX carved out a death cross about a month ago and failed to break resistance at the 50-day moving average in Monday’s session. See the embedded chart, courtesy of Yahoo Finance.
And although KMX stocks sports a fairly compelling valuation — shares fetch less than 18 times forward earnings on a growth forecast of more than 15 — sometimes stocks are cheap for a reason.
KMX management is buying back the company’s stock — that bit of financial engineering was the key to record earnings per share — but that’s not enough to make the stock attractive.
Bottom Line
What KMX really needs is an end to margin compression. Average selling prices dropped 1.1% for used vehicles and 0.7% on new vehicles.
When CarMax’s expansion starts delivering more profitable revenue growth, that’s when KMX stock will be worth another look.
Until then, shares are stuck in neutral at best.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
