Buy CarMax (NYSE:KMX) On Post-Earnings Weakness

CarMax Beats, Accelerating Trends Support Growth
The entire used car market has been in focus this year. The industry experienced a hiccup when the pandemic struck but quickly recovered and even began showing strength. The shift to pre-owned vehicles, driven by rising prices for new cars, was accelerated by the pandemic and that acceleration is not over. Now, six months past the start of the economic shut-down, omnichannel retailers like CarMax (NYSE:KMX) are riding a rising tide of demand that is fueling not only profits but growth.

The Analysts Weren’t Expecting Much Out Of CarMax

The Analysts really weren’t expecting much of CarMax in the 3rd quarter (fiscal 2nd) and that’s a surprise. Other omnichannel retailers like Sonic Automotive (NYSE:SAH), Vroom (NASDAQ:VRM), Autonation (NYSE:AN), and more have all been reporting solid figures. And then there is the data. According to industry data, demand for used cars has retail prices on the rise and that is aiding margins. Reading between the lines I see a double-tailwind in the form of rising demand and rising prices. Duh.

So, CarMax reported $5.37 billion in revenue to top the analyst’s consensus by 600 basis points. The beat is enough to not only erase the expected loss but also produce YOY growth in the amount of 3.3%. Comps and sales prices are the two most prominent factors pertaining to results. Comps grew 1.2% versus the 0.3% expected with average unit selling price topping consensus and rising $20 over the previous year. Within the report, CarMax CEO Bill Nash describes conditions as a “strengthening used car selling environment.”.

"I am confident our omni-channel experience, which gives us the largest addressable market within the used car industry, and our diversified business model will drive profitable sales growth and market share gains for years to come," says CEO Bill Nash.

The bottom-line results are equally impressive, if not more so. GAAP EPS came in at$1.79 to top consensus by $0.72 and grow from the previous year.

CarMax declined to give any guidance but, based on the trends in place, the business will likely remain steady (at least) for the foreseeable future. Based on the current consensus figures for both fiscal 2021 and 2020 the company is well on the way to topping those estimates. This has the stock set up for a round of upgrades on top of an already-bullish analyst community. The average rating is bullish but more than half the ratings are equivalent to very-bullish.

The Analysts Weren’t Expecting Much, But The Bulls Were

The analysts may have been lagging in their estimates but the market was not fooled. Investors were expecting to see more than what they got and that has shares moving lower in the p

remarket action. Add to that a relatively high 7.5% short-interest and the stage is set for the -5.0% drop in share price that has developed.

What I don’t see in the chart is a reversal. Price action has fallen to support but I expect to see buyers step in to scoop up the stock at these discounted prices. My line in the sand is $99. If the price action falls below there CarMax could be in for a much bigger pullback. Long-term, CarMax is in a secular uptrend that will probably set new all-time highs by the end of the year. The only thing I don’t like about the stock is the lack of dividends but there is a mitigating factor. CarMax still has over $1 billion in unused buy-back capital that will help support prices once buybacks are resumed.