Should You Buy CarMax After Pullback?

The stock is down more than 7%

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Nicholas Kitonyi
Apr 01, 2021
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Shares of used car retailer CarMax Inc. (

KMX, Financial) pulled back more than 7% on Thursday to trade at around $123 following the announcement of its fourth-quarter 2021 results.

The company's stock is now up more than 178% since bottoming on March 20, 2020. The current rally has propelled the company's market value to a price-earnings ratio of 27.21. This is significantly higher than the Peter Lynch fair valuation of 15.

CarMax is America's largest used car retailer with annual revenue of nearly $19 billion. From a pricing perspective, the company appears to have recovered well from the adverse effects of the Covid-19 pandemic.

Highlights from quarterly results

CarMax posted adjusted earnings per share of $1.27, down from $1.30 reported in the same quarter a year ago. Analysts were expecting earnings per share of $1.24.

Revenue for the quarter rose to $5.16 billion from $4.96 billion reported last year. This was also better than the consensus analyst expectation of $5.14 billion.

CarMax's planned expansion during fiscal 2022 will see its capital spending rise to $350 million. This compares to $164.5 million spent in 2021 and $331.9 million in 2020. The company plans to open 10 new locations within the next 12 months.

The company's annual profit fell to $18.95 billion, down from $20.32 billion last year. Earnings per share fell 15.2% to $4.52.

President and CEO Bill Nash said that the company's strategic changes continue to drive accelerated growth even as the world continues to be ravaged by the adverse effects of Covid-19.

"Our omni-channel experience and Love Your Car Guarantee further enhance the most customer-centric offering on the market today," he said. "Additionally, the rapid adoption of our online instant appraisal offer positions us to become the largest online buyer of used autos from consumers."

Valuation

From a valuation perspective, shares of CarMax are trading at a trailing price-earnings ratio of 27.21. This is relatively higher than AutoNation Inc.'s (

AN, Financial) equivalent of 21.30. Another close peer, Lithia Motors Inc. (LAD, Financial), trades at a price-earnings ratio of 20.30.

AutoNation's forward price-earnings ratio of 11.69 and Lithia Motor's equivalent of 16.26 are lower than CarMax's 23.19. This suggests that CarMax is relatively overvalued compared to its peers.

In summary, CarMax may be overvalued currently compared to its closest peers. It also looks overvalued based on the Peter Lynch fair value. Therefore, it may be prudent to observe how the company performs in the coming quarters before committing to buy.

Disclosure: No positions.

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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.