Carmax Growth Is Priced In, Shares Fall After Q4 Release

Carmax Is A Great Company With Tough Comps 

Carmax (NYSE:KMX) reported its Q4 earnings and confirmed a situation we’ve been monitoring closely. The report was good enough but failed to do one thing. The report failed to impress the market, results are only as expected, and the outlook wasn’t all that inspiring. The takeaway is that while Carmax is still growing the pace of grace is about to peak and the comps will only get tougher from here. Without some new tailwind to drive business, there is a real chance investors will lose interest in the stock and move on to something else. 

Carmax Reports Inline With Consensus 

Carmax did not have a bad quarter so do not leave with that impression. The $5.16 billion in net consolidated revenue is up 4.0% from last year, the problem is that is exactly what the consensus was expecting. The details within the report are a mixed bag in which rising prices helped to offset a decline in total sales. The total number of units sold fell by -0.9% driven by a -2.3% decline in comps. Wholesale units also decline a fair amount, -1.2%, but there is a mitigating factor. The last year’s Q4 included Leap Day and more favorable weather conditions. When adjusted for the extra day total sales and comps would have been slightly positive.

Moving down the report, the company was able to widen margins slightly better than expected. The Q4 GAAP EPS of $1.27 is $0.02 better than the consensus but down more than 3.3% from last year. The decline in earnings is blamed on COVID-related conditions that should soon pass, the issue here is that CAPEX spending plans for next year will keep pressure on earnings over the next several quarters. 

The company did not give any guidance for the Q1 period but we expect used car sales to remain steady if not accelerate due to stimulus money and tax refunds. The Q1 comp will be easy, assuming that Q1 revenue is only flat to the Q4 period produces a 60% YOY increase but that’s where the easy part ends. The 1st quarter of last year suffered the worse from pandemic conditions, the next quarter is when the boom starts but Carmax isn’t just sitting idly by. The increase in CAPEX spending we mentioned? That will go towards enhancing the company’s digital presence and opening 10 new stores which we think are strong moves. The problem right now is those moves won’t positively affect the numbers until the second half of the fiscal year at the earliest. 

Carmax Buy’s Edmunds 

Carmax revealed in the Q4 report that it had a definitive agreement with Edmunds to buy the remainder of the company. The deal is expected to close by June but isn’t expected to be immediately accretive. The value in the deal is long-term as it helps enhance the company’s digital presence while broadening its reach into the used-car market. The deal is expected to be funded with cash and stock which is another factor in today’s pre-market trading weakness. 

The Technical Outlook: Carmax Falls From Its Lofty Perch 

Carmax got a downgrade from Seaport a day before the earnings release citing is high valuation. The analysts there basically like the stock but see the growth trajectory as priced in. They downgraded to neutral which is the first major call out of the analyst’s community in two months. The consensus is still a buy but is expecting an 18% decline in share prices. Looking at the chart, we think that is very possible. 

The Q4 release sparked a round of selling that has the stock down more than 4% in premarket trading and below the short-term 30-day moving average. At this level, we can expect at least a test of support if not a move below $126.50. If price action moves below $126.50 bearish momentum could easily take it down to the $120, $115, and $110 consensus target.