CarMax Stock Down 8% Today – Time to Buy KMX Stock?


CarMax share price drops nearly 8% today in pre-stock trading stocks after the company’s earnings report covering the second quarter of 2021 was released, the retailer’s earnings from used cars based in Virginia having missed analyst estimates for the period.

In the three months ended Aug.31, CarMax reported total revenue of $ 7.99 billion, a jump of 49% from the same period a year ago, topping $ 1 billion. (16%) analysts’ forecasts based on data compiled by Capital IQ.

Retail sales grew 39.1% in this second quarter and accounted for 76% of the company’s total sales to $ 6.1 billion, up from 82% in the second quarter of the fiscal year 2020, while wholesale sales more than doubled to $ 1.7 billion.

However, measured in units, the number of used vehicles sold directly to customers (retail) only grew by 6.7% while wholesale unit sales volumes increased by 41, 4%.

Meanwhile, compared to the previous quarter, CarMax’s total revenues grew only 3.8% while retail volumes (in units) were down 14.4% and wholesale volumes declined. grew only 3.6%.

For market participants, this quarter-over-quarter deceleration in sales and volume growth may indicate that the favorable winds the company has experienced recently amid a sharp increase in the price of vehicles from opportunity in the United States could start to wear off and this could affect the company’s future results.

What future for CarMax? In the following article, I will attempt to answer this question by assessing price action and company fundamentals.

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Stock CarMax – Technical analysis

CarMax price chart (KMX) – 1 day candles with multiple indicators – Source: TradingView

In a previous article I wrote in June, I set a target of $ 140 per share for CarMax based on the positive catalyst provided by the company’s earnings report at the time. This report shatters analyst estimates and highlights the positive dynamics experienced by used car dealers.

This target was met and even exceeded, although the race was a bit bumpy as the price action partially closed the bullish gap left at the time at one point.

Now, this post-profit decline may lead to a shift in CarMax’s medium-term outlook as there are some fundamental factors that may weigh on the company’s valuation.

If this pre-market drop spills over into the live session, a complete rejection of the trendline resistance shown in the chart would be in play and a large bearish price gap will likely also appear once the session begins.

The stock’s short-term moving averages, currently found at $ 136 (20-day SMA) and $ 133 (50-day SMA) could potentially serve as support while a break below these levels could lead to a breakout. decline towards the $ 130 level – the downtrend. support for the line.

If the bullish gap is not closed, the medium-term outlook could remain bullish since even if volumes slow down, they remain quite high compared to previous years.

CarMax share – Fundamental analysis

used car price index
Used Car and Truck Price Index – Source: St. Louis Fed

Data from the St. Louis Federal Reserve shows that the price index for used vehicles and trucks in the United States has started to decline since July of this year. This would be the first time the index has seen a monthly decline since January and could signal a potential short-term spike in the uptrend used car prices have seen in 2021.

CarMax has benefited enormously from this price increase, as evidenced by its sales in the first half of fiscal 2022, with the company’s main results nearly doubling from the same period a year ago.

However, a higher contribution of wholesale sales to the mix deteriorated the company’s gross margins over the same period, from 12.9% in the first half of fiscal 2021 to 11.1% in the semester ended August 31. Meanwhile, this quarter’s figure was also 90 basis points lower than the gross margin reported a quarter ago.

As a result, the company’s profitability suffered and the decline was quite marked quarter over quarter, with diluted earnings per share falling 35% to $ 1.72.

Looking ahead, analysts expect the company’s earnings per share to gradually decline for the remaining quarters of fiscal 2022, and for the full year they expect the earnings per share is approximately $ 7.3 per share.

Perhaps more importantly, EPS growth is expected to remain stable over the next two years, but those expectations could be overly optimistic if used vehicle prices begin to gradually decline in subsequent quarters.

As a result, even if CarMax is conservatively valued at a futures price / earnings multiple of 21, if the last tailwind starts to weaken, the company’s future earnings growth will likely be negative and this will have a negative effect on its valuation. With that in mind, the outlook is currently bearish in the medium term for KMX stock.

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About Alejandro Arrieche PRO INVESTOR

Alejandro is an independent financial analyst with 7 years of industry experience. He writes technical content on economics, finance, investments and real estate and has also helped financial companies develop their digital marketing strategy. His favorite subjects are value investing, macro analysis and technical analysis. Other publications Alejandro has written for include The Modest Wallet and Capital.com.

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