CarMax: A pivotal point in the future of the company

 Overview:

CarMax is a company we've written about since the inception of this account. Long a favorite of ours, CarMax is a stock that most people have ignored while it's quietly been up over 45% in the last year alone. Why have we loved it? Because CarMax is making the necessary internal investments to modernize its product suite and bring the car shopping experience online. And not only are they investing properly, but they're firing on all cylinders too! Look no further than their most recent earnings report where CarMax beat the estimates by a wide margin! Let's break down what led the beat and what is driving us to increase our price target even further.

Details:

Last we wrote about CarMax (KMX), late last year, the stock was trading around $98 (up 35% since writing this post). During that post we referenced their omni-channel investments in which they were starting to build out their digital car sales funnel. Since then, while Carvana is still the preferred online used car retailer, KMX has made serious traction and is gaining ground on this ever expanding vertical. With car sales close to all time high's and used vehicles retaining such a large sticker value, KMX has been able to use those increased dollars in sales to continue expanding on their omni-channel strategy.

Bringing this closer to home, we saw this number in spades during their recent earnings call. During the call, CarMax announced a 59% EPS beat vs consensus expectations, largely driven by strength in their sales numbers! That is extraordinary for a mature company like CarMax. This beat was specifically due to increases in revenue from their lending division (for auto financiers), unit sales and retail GPU.

Looking more closely at the last metric we see that their $2,205 retail GPU was so much higher than what was anticipated (close to $2,055). GPU (gross profit per unit) is the gold standard number to watch for, for companies like KMX. With gross profit per unit sold so high, KMX is showing the positive yield from the investments discussed below. As their fleet transitions more and more online, this number is bound to go up and it is highly encouraging it is happening faster than expected!

You may be asking yourself, "If the stock performed so well, why did it go down?" This was largely due to the outlook, or lack thereof, the management team gave - where they said they were unable to predict what would come in the following quarters. We believe investors misinterpreted this quote, and we are feeling very strongly that this was largely due to the uncertainty around the COVID related recovery. While we agree GPU may be a blimp for this quarter, we are confident that KMX is making the transition necessary to start to take marketshare from companies like Carvana.

With this newfound increased confidence, stronger sales numbers, stronger overall margins and a push towards digital sales, we believe KMX is entering the next stage of its life. Therefore we are increasing our projections, largely driven by top-line, which backs out to our DCF model pricing KMX at $166. KMX has, and continues to be, one of our biggest sleeper picks for long term sustained growth! Please DM us with any questions you may have.

Price Target: $166

Current Price: $129

Rating: Overweight

Target Date: 8-10 Months