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Nicholas Kitonyi
Nicholas Kitonyi
Articles (404)  | Author's Website |

Should You Buy CarMax After Pullback?

The stock has pulled back 9%

December 28, 2020 | About:

Shares of America's largest used-car retailer CarMax Inc. (NYSE:KMX) are down more than 9% after the company reported the earnings results for its third quarter of fiscal 2021 last week. The company posted earnings and revenue that topped analyst expectations amid a challenging business environment.

Shares of CarMax are now up 105% since bottoming in March, but are only up about 1.67% year-to-date. In my opinion, this suggests that despite the impressive rally over the last nine months, there could still be some room left to run.

The latest pullback in the stock price could be an opportunity to add a high-quality stock to your portfolio going into calendar 2021.

Highlights from recent quarterly results

In the company's most recent quarterly results, CarMax posted a 36.54% year-over-year increase in earnings per share to $1.42, which beat the consensus estimate of $1.14.

Revenue for the three months ended Nov. 30 grew 8.24% year-over-year to $5.185 billion. This was also better than the average Wall Street estimate of $5 billion.

The company's auto finance unit, CarMax Auto Finance, posted 54.7% growth, driven by favorable loan loss performance and higher net interest margin in addition to decent growth in managed inventories.

CarMax also said that it realized a record third-quarter buy rate in its wholesale business, which saw units sold increase by 10.8% year-over-year. The company also hailed its omnichannel platform for improving customer experience and boosting online sales.

CarMax CEO Bill Nash said that the well-diversified business model, which covers wholesale, retail and auto finance, has kept the company's fundamentals strong despite the pandemic:

"This strength, combined with our emerging omnichannel experience, is a unique advantage in the used car industry that firmly positions us to continue growing our market share while creating shareholder value over the long-term."

Valuation

CarMax shares are currently trading at a trailing 12-month price-earnings ratio of 20.06. This is relatively higher than close peer AutoNation Inc.'s (NYSE:AN) 12-month price-earnings ratio of 15.72. This suggests that CarMax could still be overvalued, despite the recent pullback.

The stock is also trading above the fair value estiamted by the Peter Lynch chart, as shown below:

When we factor the growth for the next 12 months that Morningstar analysts expect, CarMax's forward price-earnings ratio is 16.67, which is still higher than AutoNation's 10.26. The company's valuation multiples still price it more expensively than its most direct competitor when we factor in expected earnings growth for the next five years. CarMax has a PEG ratio of 1.56, which is significantly higher than AutoNation's 0.86.

In summary, shares of CarMax still look relatively overvalued compared to major industry peers, despite the recent pullback. This suggests that it may be ideal to wait and see how it performs in the next quarter before pouncing on the pullback, in my view.

Disclosure: No positions in the stocks mentioned.

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About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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