Carmel, Ind.-based CarMax, Inc. (KMX) is the largest retailer of used cars in the United States. For its fiscal third quarter, ended Nov. 30, 2021, KMX’s net revenues increased 64.5% year-over-year to a record $8.50 billion, which was 15.2% higher than the $7.38 billion FactSet consensus estimate. This can be attributed to a 29.3% rise in total unit sales through retail and wholesale channels. KMX’s total gross profit improved 32.5% from the prior-year quarter to $836.60 million. Its EPS came in at $1.63, up 14.8% from the same period last year, and its surpassed FactSet Street's $1.45 estimates by 12.4%.

KMX President and CEO Bill Nash said, “Our top line momentum continued into this quarter, and we achieved record levels of third-quarter unit sales in both retail and wholesale, generating all-time record revenues. We also bought more cars from customers than ever before. We are excited about the opportunities ahead of us and believe that by delivering the most customer-centric experience in the industry, we will enable sustainable growth and create meaningful long-term shareholder value.”

However, shares of KMX have since declined 6.1% in price to close yesterday’s trading session at $127.49. Investors have been concerned about KMX’s rising SG&A and interest expenses as well as macroeconomic headwinds, such as record-high inflation and COVID-19 related concerns.

Here is what could shape KMX’s performance in the near term:

Lower-Than-Industry Profit Margins

KMX’s 13.1% trailing-12-month gross profit margin is 63.5% lower than the 35.91% industry average. Its 6.07% EBITDA margin is 52.6% lower than the 12.8% industry average. In addition, the company’s 3.92%, 4.61%, and 4.7% respective trailing-12-month net income margin, ROTC, and ROA compare with the 6.56%, 7.56%, and 5.94% industry averages.

Also, the company’s trailing-12-month levered free cash flow margin is negative.

Solvency Concerns

KMX’s total debt stands at $18.58 billion. With $62.60 million in total cash, the company’s net debt amounts to $18.52 billion. Its total debt-to-equity ratio is 363.57%. However, the company does not have sufficient cash flows to meet its debt and principal repayment obligations. Its trailing-12-month net operating cash outflow and levered free cash outflow stand at $2.28 billion and $778.48 million, respectively. Consequently, the company’s debt/free cash flow ratio is negative 22.43. KMX’s long-term debt accounts for 75.94% of its total capital.

Stretched Valuation

In terms of forward non-GAAP P/E, KMX is currently trading at 17.23x, which is 18% higher than the 14.60x industry average. And its 1.10 forward non-GAAP PEG multiple is 12% higher than the 0.98 industry average.

The stock’s 20.45 forward EV/EBITDA ratio is 99.7% higher than the 10.24 industry average. Its forward Price/Book and Price/Cash Flow multiples of 4.58 and 47.40, respectively, are significantly higher than the 3.37 and 12.68 industry averages.

POWR Ratings Reflect Bleak Prospects

KMX has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Quality and a C for Momentum. Its lower-than-industry profit margins justify the Quality grade. In addition, KMX is currently trading below its 50-day and 200-day moving averages of $143.18 and $132.42, respectively, indicating a downtrend. This justifies the Momentum grade.

Of the 26 stocks in the B-rated Auto Dealers & Rentals industry, KMX is ranked #22.

In addition to the grades I have highlighted, one can view KMX ratings for Growth, Sentiment, Stability, and Value here.

Bottom Line

Despite the ongoing Santa Claus rally, shares of KMX have been foundering lately. And investors and analysts expect the company’s lower-than-industry profit margins to fall further amid rising expenses, record-high inflation levels, and the rapid spread of the COVID-19 omicron variant. So, analysts expect KMX’s EPS to decline 17.9% in the next quarter. Thus, we think KMX is best avoided now.

How Does CarMax, Inc. (KMX) Stack Up Against its Peers?

While KMX has a D rating in our proprietary rating system, one might want to consider looking at its industry peers, PT Astra International Tbk (PTAIY), Rush Enterprises, Inc. (RUSHA), and AutoNation, Inc. (AN), which have an A (Strong Buy) rating.

KMX shares were unchanged in premarket trading Tuesday. Year-to-date, KMX has gained 34.97%, versus a 29.35% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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