Zooming To New Highs
With CarMax (KMX) slated to report earnings on Friday before the bell investors would do well to consider buying this stock. While the pandemic has wreaked havoc on the near-term outlook this company is positioned to bounce back and stronger than ever. Not only is the business supported by secular trends, but pent-up demand and the accelerating economic recovery has this company set up to gain market share and grow earnings at a high-double-digit pace over the next three to five years.
What trend am I talking about? The trend toward after-market cars, a trend fueled by rising prices for new cars and, now, incomes pinched by the pandemic.
What The Analysts Are Expecting
The analysts are expecting to see Carmax post a deep decline in EPS for the quarter, in the range of 50% both sequentially and YOY, but there is a high-probability the company will exceed expectations. If nothing else, the Retail Sales figures for May are encouraging and point to strength in the auto sales rebound. While total auto sales are still down YOY on a trailing 5-month basis the sequential MoM 30% gain shows a marked improvement from the peak of the pandemic.
Looking forward, the consensus is for the company to return to YOY growth as early as next year. More importantly, the current consensus shows a small gain in revenue over the two-year period giving evidence of underlying strength despite the pandemic. Assuming CarMax exceeds the consensus as I expect it to do the consensus estimate for this year and next will start rising. When it does that will be a catalyst for higher share prices.
eCommerce Will Spur Growth
The success of Vroom’s (VRM) IPO shows there is a way for used-car dealers to make money with the Internet. The success of eCommerce during the pandemic shows, no proves, that society as a whole is embracing eCommerce. If you don’t know, eCommerce sales spiked 30% YEAR OVER YEAR in the last month because of the pandemic. And CarMax is making moves to capture its share of the business.
Analysts at JP Morgan initiated coverage on CarMax just a few days ago citing that very fact. According to Rajat Gupta CarMax push into eCommerce will not only support growth over the foreseeable future but it will also spur a long-term multiple expansion. That’s great news for shareholders.
"While the COVID-19 pandemic is set to weigh on earnings near-term, ultimately it should accelerate the company’s omni-channel roll-out, resulting in higher throughput in the attractive used vehicle retail market … Revenue growth post-pandemic is likely to convert at a higher incremental margin, given both a move toward more on-line sales and leaner cost structure. As these initiatives begin to bear fruit and the benefit to earnings trajectory beyond FY21 becomes more clear, we expect KMX’s P/E multiple to gravitate higher over time, similar to other retailers that have successfully embraced on-line sales.”
The Technical Outlook: A Robust Vee-Shaped Recovery, If Ever I Saw One
The technical outlook for CarMax is robust, to say the least. The company has effected a very strong Vee-shaped recovery post correction and now share prices are poised to retest the all-time high. The indicators are both bullish, rising in tandem with prices, and showing some strength so a retest of the high is the least we should expect. If price action is able to post a new high, investors can look forward to another 20% upside before the end of the year. The only thing this stock doesn’t have going for it is a dividend.
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