CarMax Stock Price Up 7% today – Time to Buy KMX Stock?

CarMax stock is surging 7% today after the company published its earnings report covering the first quarter of its 2022 fiscal year with both sales and revenues beating analysts’ estimates for the period.

Higher demand and prices for used autos were the main cause for these positive results with sales surging 138.4% compared to the previous year at $7.7 billion while surpassing analysts’ estimates by $1.48 billion or 23%.

Moreover, CarMax saw its bottom-line profitability move from $0.03 last year to $2.63 per share amid higher gross profits per vehicle and lower operating expenses as a percentage of revenue.

During the period, the company managed to multiply its auto-finance income by 5 times while the number of vehicles sold doubled. Moreover, average selling prices experienced a 10.7% advance while wholesale vehicle prices surged 42.2%.

Is this record-shattering quarter providing a signal to buy CarMax stock amid a significant improvement in the performance of the business? The following article takes a closer look at CarMax’s fundamentals to possibly answer that question.

Buy KMX Stock at eToro, the World’s #1 trading platform!

CarMax stock – fundamental analysis

Before this quarter, CarMax’s annual sales had been experiencing a decline as they came 6.2% lower by the end of the firm’s 2021 fiscal year amid the pandemic. However, before the virus crisis stroked, sales were growing at a decent pace, moving from $9.4 billion in 2011 to $21.4 billion by the end of the 2020 fiscal year at a compounded annual growth rate of 9.6%.

This quarterly jump is showing a remarkable acceleration in the company’s top-line performance, as those $7.7 billion represent more than 33% of the firm’s forecasted 2022 sales as per data from Seeking Alpha.

If the company maintains this growth rate in the following quarters, chances are that sales could land above the $28 billion level for a 39% jump amid higher demand and prices. Moreover, the firm’s top-line profitability also improved, with gross margins moving 100 basis points higher at 12% while the firm’s net margin landed at 5.7%.

By the end of the company’s 2021 fiscal year, CarMax’s long-term debt landed at $15.6 billion including $13.84 billion in non-recourse notes, which are related to the financing provided to customers. This represents around 68% of the company’s total assets of $22.83 billion. Of those, $14.16 billion are auto loans.

If we take out these two related items from the balance sheet, CarMax would be holding a long-term debt of around $1.76 billion on assets of $8.63 billion including $378 million in cash and equivalents – excluding restricted cash – by the end of the first quarter of its 2022 fiscal year.

Meanwhile, at a market capitalization of $19.30 billion, CarMax is being valued at 0.62 times its forecasted revenues for 2022 based on a run-rate of this $7.7 billion reported by the company this quarter.

On the other hand, if the firm manages to maintain its net profit margin at 5% for the year, KMX could generate around $1.54 billion in net earnings by the end of the year, resulting in a forward price-to-earnings ratio of 12 for CarMax.

Based on the firm’s conservatively financed balance sheet and solid profit margins along with the positive momentum in the demand for used cars, this firm seems fairly undervalued considering its growth prospects in the current favorable environment.

CarMax stock – technical analysis

CarMax stock has been on a steady uptrend that started in March last year, with the stock progressively posting a series of higher highs and higher lows while delivering a solid 32.3% gain for investors this year after advancing 7.7% during 2020.

However, the momentum for the stock has been on a downtrend as shown by both the Relative Strength Index (RSI) and the MACD, both of which have been posting lower highs and lower lows even as the price has continued to climb.

Today’s surge would mark the fifth consecutive green session for CarMax stock and momentum seems to be picking up steam as the MACD is moving to positive territory while the RSI seems to be reversing its latest downtrend.

This reinforces a bullish outlook for the stock and the price gap left behind during today’s price action could support a move higher in the following days, with a first target of $140 for the stock for a potential 10.7% upside.

Meanwhile, the company’s robust fundamentals and growth prospects would play a positive role in supporting this bullish outlook amid higher prices and demand for used cars in the United States.

Buy KMX Stock at eToro, the World’s #1 trading platform!