Morningstar

CarMax Earnings: Stock’s Rise Likely Reflects Too Much Market Pessimism Than High Earnings Quality

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Securities In This Article
CarMax Inc
(KMX)

CarMax KMX finished fiscal 2023 with fourth-quarter diluted EPS of $0.44 easily beating the Refinitiv consensus of $0.24 and sending the stock up by over 10% during April 11 trading. We are leaving our fair value estimate in place but will reassess all valuation inputs when we roll the model forward for the 10-K yet to be filed. Ever since CarMax entered its current rough profitability state due to the pandemic and chip shortage, we’ve felt that the stock can eventually rise as used vehicle affordability improves.

The fourth quarter showed some signs of this thesis playing out with retail average selling price of $26,598 down 9.3% year over year and gross margin per retail unit increasing by 110 basis points to 8.5%. However, we still see a full recovery a long time off and feel the EPS beat is more due to expectations getting too pessimistic than due to a strong quarter. For example, consumer affordability remains a problem for all used vehicle retailers despite the ASP decline due to still-high price levels historically and high interest rates. CarMax’s same-store unit sales fell by 14.1% and led to a 14.1% decline in total gross profit dollars, which, in turn, meant overhead costs as a percent of gross profit rose 650 basis points to 93.8%, far above the company’s mid-70s target. Volumes need to improve to reach that level, but new vehicle inventory at just over 1.8 million units when it should be closer to at least 3 million means at least several more quarters are needed to bring full supply online, which will help used vehicle supply and we expect bring pricing down.

We calculate rising inventory after a pullback in the fiscal third quarter led to fourth-quarter adjusted free cash burn of $359.3 million, the only negative adjusted free cash flow quarter of fiscal 2023. Still, CarMax ended the year with $314.8 million of cash. Management did not repurchase stock in the quarter, which is consistent with its announcement at third-quarter earnings.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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