Back around the start of summer, we took a look at CarMax (NYSE:KMX) and discovered that it was a company to “watch ahead of earnings.” Indeed, that's just what CarMax turned out to be as its latest earnings reports emerged and showed that the company was continuing to keep the streak alive, turning in an impressive earnings report that makes it clear this is still a company to watch, if you haven't already invested herein.
The Numbers Beat Expectations to a Pulp
The numbers that emerged for CarMax this quarter are astonishing. The consensus estimate said that CarMax would be lucky to clear a dollar a share this quarter, calling for $1.08 in earnings per share (EPS). The actual EPS, meanwhile, turned out to be nearly double that figure at $1.79.
It only gets better from there. Gross profit was up 8.5% as compared to the second quarter of 2019, which offered up an already-healthy $752.1 million in gross profit. Gross profit per individual vehicle was up 5.4%, which likely reflects some cost-cutting measures at work, but also some gains in car prices from where they were back in April or so.
What's more, the company also managed to pull a lot more utility out of CarMax Auto Finance, its financing arm. Income for the group was up 29%, hitting $147.2 million. This was due mainly to reduction in provision for loan losses, which went from $26 million to $45.5 million the same time last year. Loan losses were down in the second quarter—which is actually kind of amazing given what's been happening in the field—and that led to reductions in provision for future loan losses. That may be a bit short-sighted—again, given what's been happening in the field—but it's hard to fault their optimism.
The company's stock buyback plans are still suspended, reports noted, and the company still has $1.51 billion available to it to engage in such behaviors when, or possibly if, that starts back up again.
A Pool of Happy—and Vindicated—Analysts
These numbers are fantastic, especially for a company whose focus is used car sales in the middle of a pandemic. Moreover, these numbers go a long way toward cementing the very positive outlook that analysts hold for this stock so far. Right now, of the 14 analysts we've seen covering the stock, just one has a “hold” rating.
Just to get the worst possible scenario out of the way, none have a “sell” rating. That leaves us with 12 “buy” ratings and one “strong buy” rating, which means 13 out of 14 analysts have at least some kind of “buy” rating on this stock. That's a majority that's hard to overlook, especially when the lone dissenter merely suggests you hang on to what you've got already.
With a consensus price target of $105.75, and a current price of $96.25—well off yesterday's close of $105.88—it's clear that there's quite a bit of profit-taking taking place right now and some excellent room to buy in.
More Sustainable Than You Might Think
There's no doubt that CarMax has done well this quarter. It's downright cleaned up; the numbers are almost unfathomably good and there aren't a whole lot of signs of retraction. However, with the overall economy starting to look a bit shaky as re-opening processes don't quite bite the way we would have liked to see them, the idea that a ton of people will be running out to replace their old cars is shaky.
We've already seen huge gains from auto parts operations like O'Reilly Automotive (NASDAQ:ORLY) in recent days as people try to repair what they've already got on hand, taking advantage of time and stimulus checks to pick up auto parts. That's not exactly the kind of market that suggests CarMax will continue to do well as people patch together their old carsin the hopes of getting a little more mileage out of them.
However, this may actually be a blessing in disguise. You can repair and replace parts on a car until it's no longer technically the same car you bought, but there always comes a point when a car must be replaced. Operations like CarMax and its various competitors will be on hand to do the job quickly and effectively. The numbers show how well that went this quarter. Though next quarter's returns may be a bit more doubtful given the overall economic situation, there's every sign that CarMax will continue to come out ahead for some time to come. All those patched-up cars are going to fail eventually, after all.
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