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CarMax Q3 Earnings Preview: Will the Report Drive KMX Stock?

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CarMax (KMX - Free Report) will report its third quarter earnings before the market opens on Friday, December 20. The automobile retailer’s stock is up over 57% in 2019 to outpace the automobile retail market’s 33% run.

The industry’s strong year has also been led by AutoZone (AZO - Free Report) and O’Reilly Auto Parts (ORLY - Free Report) . CarMax has also been able to have a breakout year despite the broader uncertainty in big ticket items like automobiles.

Gaining Steam

CarMax has been able to pick up steam in a market where the trade war has casted a cloud over the industry. The market also faces the uncertainty about whether younger millennials are willing to take on the commitment of buying an automobile. CarMax has tried to provide an alternative to consumers looking to purchase a car without the traditional hassles.

The used car retailer saw its net revenue grow 9% to $5.2 billion last quarter and bottom-line climb about 13% to $1.40 per share. Wholesale vehicle sales climbed 8%, with CarMax buying a higher percentage of appraised vehicles even as the volume of appraisals eased lower.

Comparable used-car unit sales were up 3.2% from year-ago levels, as CarMax sold 6.2% more used cars during the period than it did in the previous year period. Meanwhile, gains in other sales and revenue accelerated 8.5%.

Outlook

CarMax believes it still has room to grow despite being the largest used-car retailer in the United States. The company plans to leverage its scale to reach more consumers through its omnichannel strategy. The automobile retailer attempts to service customers who want to shop for a car online, in person, or a mix of both.

Some automobile retailers, like Carvana (CVNA - Free Report) , do well online but other smaller retailers don’t have the capital to afford a large website or the inventory required to bring a website enough reach. CarMax’s omnichannel abilities give the used car retailer an advantage over competitors and extends its growth runway. “Customers continue to tell us they value an omnichannel experience, empowering them to shop on their terms whenever and wherever is most convenient for them,” CEO Bill Nash said on the Q2 earnings call.

In addition, the company spent $128.3 million to buy back 1.5 million shares in Q2, which was a somewhat slower pace than in the first quarter. CarMax still has another $1.78 billion in accumulated cash left to potentially finance future repurchases.

Our Q3 consensus estimates forecast earnings to climb over 6% to $1.16 per share and for net revenue to climb 9.61% to $4.71 billion. Sales growth would be right on par with Q2 and earnings would be down from Q2’s 13% hike.

Used vehicle sales are projected to grow about 9.2% to $3.9 billion, which would be right on par with the growth rate it saw in the second quarter. Wholesale vehicle sales are estimated to grow 5%, which would represent a slight decrease from the 8% growth in Q2. Other sales and revenues are forecasted to rise 6.9%.

Bottom Line

CarMax’s omnichannel approach should bode well for the company as it provides a level of convenience to its customers that is difficult to find in the auto retail industry. CarMax has beaten our estimates the last four quarters with an average EPS surprise of 7.14%. The stock currently sits around 1.8% its 52-week high, and a strong report could send the stock to a new high.

The company currently trades around 17.5X its forward earnings, which is slightly below the industry average of 19.2X forward earnings. The discounted valuation could provide a solid entry point before a potential breakout.

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