You don’t need to look too far to get the heebie-jeebies with used-car dealership company CarMax (NYSE:KMX). The chart is a mess, analysts aren’t digging it, and management isn’t confident about the current economic backdrop. It seems like a recipe for disaster. However, the stock looks underpriced, and we can’t forget that a personal vehicle is indispensable for millions of American workers (and even retirees). So, if you like bold contrarian ideas, consider my bullish angle on KMX stock.
KMX Stock Appears as an Unmitigated Disaster
Of course, I’m not immune to the serious concerns leveled against KMX stock. It’s an enterprise struggling against an ugly backdrop, with those closest to the business seemingly at a loss for words.
Thankfully, we have TipRanks contributor David Moadel, who succinctly summed up the problem. KMX stock is bleeding, and prudent investors are leaving, his headline reads. Last week, shares suffered a loss of 14%. Contributing to the bulk of the pain was the dealership’s fourth-quarter Fiscal Year 2024 results.
As TipRanks reporter Kailas Salunkhe noted, CarMax’s top line contracted by 1.7% year-over-year to $5.63 billion. This figure missed the consensus view by $150 million. On the bottom line, earnings per share landed at 32 cents, missing expectations by 14 cents.
“The downturn comes amid low consumer confidence, inflationary pressures, and high interest rates. Throughout the quarter, CarMax sold retail units at prices 2.3% lower and wholesale units at prices 3.2% lower. These dynamics led to a 4.1% decrease in the company’s gross profit, totaling $586.2 million in Q4,” wrote Salunkhe.
It was a bad day in the office, and it got worse. In particular, CarMax aims to sell more than two million vehicles annually. However, management must extend the timeframe to reach this goal, which could land between Fiscal Year 2026 to 2030.
Obviously, that’s not the news that investors wanted to hear, leading to the volatility in KMX stock. Still, it’s important to consider the broader fundamentals.
Don’t Forget That Americans Need to Drive
If CarMax was a European business targeting the home market, KMX stock would be far more problematic. In major cities across the Atlantic, transportation options are robust. That’s just not the case with the U.S., particularly in cities outside certain east-coast metropolises.
We don’t need to get into a history lesson, but as sociologists have pointed out, much of America was built on the concept of the open road. Further, certain regions – no matter how advanced they are, like Los Angeles County – practically require a personal vehicle. Public transportation is simply too inconvenient and doesn’t effectively cover all areas.
In a more recent development, millennials left big cities to move to more rural areas. That just exacerbates the challenge regarding public transportation. Long story short, people need their personal vehicles, whether to go to work, get groceries, or any number of endeavors.
Keep in mind that between 2020 to 2023, light vehicle retail sales expanded from 14.47 million units to 15.5 million units. Sure, in 2022, there was a dip to 13.75 million units due to blistering inflation. However, even with 2022’s downturn, the fundamental reality pops up: people need cars.
And in this environment where inflation is hurting the value of the dollar, consumers need to make their purchases count. That’s where CarMax features a massive advantage and is why KMX stock should not be dismissed. With the company’s extended warranty, drivers can have peace of mind.
Yes, generally speaking, it’s cheaper to negotiate a deal private party. Here, the challenge is that you just don’t know what you’re getting into. While CarMax is typically the higher-priced option in the used-car ecosystem, its extended warranty represents a significant differentiator.
KMX Stock Possibly Presents Good Value
Let’s talk numbers. With KMX stock struggling in the market, it may present good value for bold contrarian investors.
Right now, CarMax shares trade at 0.40x trailing-12-month revenue. At the end of the current fiscal year, analysts project that revenue will hit $26.7 billion. Assuming the same share count of 157.9 million, the sales multiple will rise slightly to 0.42x. If we assume that the top line hits the high end of the estimate spectrum or $28.58 billion, the multiple will drop to 0.38x.
That’s notably lower than the auto dealership sector’s average sales multiple of 0.5x. Because retail vehicle sales demand should be relatively consistent due to the underlying need, the low multiple features some credibility. Therefore, it’s not inconceivable that KMX stock is a high-risk, high-reward buying idea.
Is KMX Stock a Buy, According to Analysts?
Turning to Wall Street, KMX stock has a Hold consensus rating based on four Buys, three Holds, and two Sell ratings. The average KMX stock price target is $82.13, implying 18.2% upside potential.
The Takeaway: KMX Stock Still Has an Ace Up Its Sleeve
While KMX stock appears to be an ugly investment, with CarMax revealing poor results and a lack of forward confidence amid challenging economic conditions, personal vehicles represent a critical business. Further, the company’s offering of valuable extended warranties is a huge differentiator. Therefore, the discount in KMX stock may be a buying opportunity.
