CarMax Stock Up 5% Today – Time to Buy KMX Stock?

The price of CarMax stock is surging 5% this morning in pre-market stock trading action following the release of the firm’s financial results covering the third quarter of its 2022 fiscal year after beating analysts’ forecasts for both revenues and earnings.

For the three months ended on 30 November, CarMax reported total revenues of $8.5 billion resulting in a 64.5% jump compared to the same quarter a year ago. This figure was significantly higher than the consensus estimate of $7.4 billion for the period as compiled by Capital IQ.

A total of 415,054 units were sold during these three months to both retail and wholesale customers resulting in a 29.3% year-on-year jump. Wholesale unit sales contributed the most to this positive performance as they increased 48.5% compared to Q3 2021 while retail sales advanced 16.9% during the period.

Gross profits for both retail and wholesale vehicles increased compared to a year ago but the firm’s gross margin declined 80 basis points to 9.8% amid a reduction in the top-line profitability of other activities excluding vehicle sales.

Average selling prices for both retail and wholesale vehicles have continued to climb, moving 30.8% and 58.4% higher compared to the third quarter of the 2021 fiscal year respectively.

Meanwhile, net earnings per share grew to $1.63, up from the $1.42 reported by the firm during the same period a year ago. This figure exceeded analysts’ consensus estimate of $1.44 per share for the quarter as well.

What can be expected from this used car seller following this strong quarterly earnings report? In this article, I will be assessing the price action and fundamentals of CarMax stock to outline plausible scenarios for the future.

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CarMax Stock – Technical Analysis

Back in September when I last wrote about CarMax, I highlighted that the trend line support was the last line of defense for the rally that started after the pandemic.

Bears were trapped in the days that followed that pronounced post-earnings decline as bulls took advantage of the break to pull a short-squeeze that ended up lifting KMX stock to fresh all-time highs.

Since that 2021 peak, the stock has been declining and, just yesterday, the price broke below the trend line support once again a day before this earnings report came out.

Interestingly, today’s post-earnings jump could lead to another short-squeeze that can end up pushing the price of KMX stock to new all-time highs if bears are trapped again.

Momentum indicators show that the selling spree has been quite sharp and this increases the likelihood of a squeeze.

Moving forward, if the price breaks above the symmetrical consolidation triangle shown in the chart, chances are that CarMax stock could jump to the $170 level in the following weeks.

CarMax Stock – Fundamental Analysis

For the nine months ended on 30 November, CarMax reported earnings per share of $6 on a fully diluted basis.

What is interesting is that macro conditions remain favorable for the company as indicated by the sustained increase in the price of both retail and wholesale vehicles. This should lead to improved gross margins down the road and should also have a positive effect on KMX’s financing operation as loan originations may increase as well.

Using a simple run-rate of the firm’s EPS for the first nine months of the year, CarMax is currently trading at 17 times its forecasted earnings per share for this year.

The company’s ability to keep pushing its earnings per share higher in the following years is the most relevant price driver at the moment. However, it is unclear for how long the price of used vehicles will continue to increase.

This largely depends on the trajectory of inflation rates, the Federal Reserve’s monetary policy, and other similar factors.

Since the behavior of all of those variables is highly unpredictable, the current valuation seems fair in a scenario where earnings could stay flat at some point when economic conditions change.

With this in mind, even though the short-term outlook for CarMax stock is bullish, the mid-term outlook is neutral to bearish as the market seems to have already priced most of the growth that the company has experienced.

This increases the risks that, once and if economic conditions shift, the market will start to factor in lower earnings growth rates and that could result in a sharp correction.

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