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S&P 500   3,957.63
DOW   33,852.53
QQQ   280.57
Three Reasons It’s Time To Get Bullish On Organigram
The Lithium "Lie" (Ad)
The AP Interview: IMF head urges China to end mass lockdowns
Survivor of Virginia Walmart mass shooting files $50M suit
The Lithium "Lie" (Ad)
US stocks edge lower in unsteady trading, oil prices rise
Walmart employee who survived mass shooting at store in Virginia has filed a $50 million lawsuit against the company
The Lithium "Lie" (Ad)
Which Stocks Are Black Friday, Cyber Monday Winners & Losers?
Competitors chip away at Tesla's US electric vehicle share
S&P 500   3,957.63
DOW   33,852.53
QQQ   280.57
Three Reasons It’s Time To Get Bullish On Organigram
The Lithium "Lie" (Ad)
The AP Interview: IMF head urges China to end mass lockdowns
Survivor of Virginia Walmart mass shooting files $50M suit
The Lithium "Lie" (Ad)
US stocks edge lower in unsteady trading, oil prices rise
Walmart employee who survived mass shooting at store in Virginia has filed a $50 million lawsuit against the company
The Lithium "Lie" (Ad)
Which Stocks Are Black Friday, Cyber Monday Winners & Losers?
Competitors chip away at Tesla's US electric vehicle share
S&P 500   3,957.63
DOW   33,852.53
QQQ   280.57
Three Reasons It’s Time To Get Bullish On Organigram
The Lithium "Lie" (Ad)
The AP Interview: IMF head urges China to end mass lockdowns
Survivor of Virginia Walmart mass shooting files $50M suit
The Lithium "Lie" (Ad)
US stocks edge lower in unsteady trading, oil prices rise
Walmart employee who survived mass shooting at store in Virginia has filed a $50 million lawsuit against the company
The Lithium "Lie" (Ad)
Which Stocks Are Black Friday, Cyber Monday Winners & Losers?
Competitors chip away at Tesla's US electric vehicle share

Declining Profits Challenge the CarMax Value Proposition

Key Points

  • CarMax stock is dropping sharply after reporting a steep drop in profits. 
  • Consumers are voting with their wallets, which is consistent with the current monetary policy. 
  • If the worst is baked in, KMX stock is starting to look properly valued 
Declining Profits Challenge the CarMax Value Proposition

The used car dealership CarMax (NYSE:KMX) disappointed investors with a lemon of an earnings report. The company showed softer revenue than expected. But the headline number was the company’s profit decline. The company reported earnings per share (EPS) of 79 cents, nearly 50% below the average analyst estimate for $1.40 per share.  

Not surprisingly, shares of KMX stock are down 23% in mid-day trading following the report. That brings the year-to-date loss down to almost 50% for the stock. This is particularly troublesome because the stock was already performing worse than the broader market. 

But this isn’t a surprise to most investors, and certainly not to most consumers. Used car prices were one of the first indicators of rising inflation. And with inflation likely to remain sticky for some time, consumers are taking matters into their own hands.  

This Could Take Awhile 

Since the earnings report, some analysts are proclaiming the used car boom is over. That may be true. But I’m not sure if that’s going to be much relief for used-car buyers in the near term. Like inflation itself, prices of used cars may not be increasing, but it’s not the same thing as having prices go down. That’s not likely to happen right away. And there are two significant reasons for that.  

First, the auto industry still faces a supply-demand imbalance. Therefore, in situations where buying a new car is a necessity instead of a nice-to-have, consumers are likely to be facing elevated prices for some time to come.  


Second, if you take the Federal Reserve at its word, interest rates are going to continue to rise into 2023. That means that many consumers who are priced out of the market will remain priced out of the market. And unfortunately, it may mean that more consumers will be priced out. 

I’ll offer a bonus reason as well. Individuals who are planning to finance a vehicle may find that, if they can afford it, the difference between a new and a used vehicle (in terms of monthly payments) may make it more cost-effective to buy a new vehicle.  

Is The Worst Over for KMX Stock? 

Investors and consumers need to be careful not to miss the point of CarMax’s earnings. The company has created a more efficient way to sell cars. That’s not going away. But efficiency can’t overcome every purchase obstacle.  

And that efficiency comes at a cost. The company said that its general and administrative expenses increased by 18% in the quarter due, in part, to investments in technology. While those are likely to pay for themselves, the company’s results show that it doesn’t matter how easy it is to buy a car if demand is not there. And price is still the most significant factor. 

That being said, CarMax is still expected to grow revenue over the next five years, albeit at a much slower pace than in the past couple of years. But that is likely to be a drag on earnings which are forecast to have an average decline of around 3% in the next five years.  

I don’t own or plan to own KMX stock. But if I was considering it, that would be the question I’d be asking. If it is, then you could point to an appealing price-to-earnings ratio of around 11x earnings as a reason to look at the stock. However, that’s still higher than AutoNation (NYSE:AN) which has a P/E ratio of around 4x earnings and just saw its quarterly earnings make an all-time high.  

Should you invest $1,000 in CarMax right now?

Before you consider CarMax, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and CarMax wasn't on the list.

While CarMax currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.

View The Five Stocks Here

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
CarMax (KMX)
2.0582 of 5 stars
$67.12+2.4%N/A13.53Hold$83.80
AutoNation (AN)
2.0952 of 5 stars
$122.77+2.9%N/A5.02Moderate Buy$144.50
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Chris Markoch

About Chris Markoch

Contributing Author: Retirement, Individual Investing

Chris Markoch is a freelance financial copywriter with over five years of experience covering various aspects of the financial markets. You may find his writing a little different than other stock articles you’ve read. And that’s OK with him. Chris doesn’t have a traditional finance background. What he does bring to the table is a strong business and marketing background having worked for agencies that serviced Fortune 500 companies. With that in mind, he isn’t overly impressed with what companies say, and more focused on what they do. And because buyer behavior dictates so much of what happens with a stock, Chris always keeps the end consumer close in mind. Chris has been writing for MarketBeat since 2018.

Contact Chris Markoch via email at CTMarkoch@msn.com.