CarMax (NASDAQ: KMX) had a rough quarter but the weakness is to be expected in a world where prices are rising everywhere you look and particularly fast in the used car industry. The company’s Q2 results were weaker than expected but also reveal the company’s underlying strength and position within the used car market. While near-term headwinds are pressuring the business, the business continues to expand and gain market share which will be a double-boost for revenue and earnings when the industry stabilizes.
The Sell-Side Is Holding And Buying CarMax
The institutions were buying the stock heavily going into the report and may step up their buying now that prices are at a 30-month low. The institutions have been net buyers for the last 5 quarters, in fact, and ramped their purchases to multi-year highs in Q2 and Q3 of this year. This has their total holdings up to 96.1% and growing which is a noteworthy fact in light of the 1.65% insider holdings and the 8.5% short interest. All it will take is the right news and/or signal from the market for the stock to start bottoming.
And the analysts are still bullish on the stock as well. Although the sentiment and price target have been waning the community is still rating a Hold/Moderate Buy with a price target that is about 37% above the new lows. The most recent activity, the 6 analysts' commentaries that we’ve tracked since the report was released, include 6 price target reductions and 1 downgrade to Equal Weight that have the stock trading closer to $77 which is still about 15% above the recent price action and suggests a rebound will happen once the market starts to bottom.
CarMax Falls On Weak Results
CarMax had an OK quarter if one that was deeply impacted by headwinds within the industry. The company reported $8.14 billion in revenue for a gain of 1.9% over last year but missed the analyst's consensus estimate by 480 basis points. The miss is due in part to rising prices and interest rates and their impact on the consumer. In regard to units, the number of retail units fell 6.4% versus last year with comp store volume falling 8.3% and wholesale by -15%. This was offset by an increase in car price but the increase was far less than the analysts were looking for and not enough to sustain the margin.
The margin was impacted at the gross and operating levels by a pullback in used-car value and an increase in SG&A. The increase in SG&A is due in part to higher cost and increased labor but also by increased investment in digital and growth. The bad news is that $0.79 in GAAP earnings is $0.58 weaker than expected and below the prepandemic level as well. The takeaway, however, is that while there are headwinds in the near term the company’s revenue is up more than 55% versus the prepandemic level while the stock is trading at a 30% discount. It may take some time but the market for used cars will stabilize as will the market for CarMax stock.
The Technical Outlook: CarMax Falls To Support
The price action in CarMax took a dive after the Q2 results were released but the stock may already be at the bottom. Price action was halted above the $63 level and has begun to rebound although it is very early in the move to call a bottom. If the market follows through on this move and advances from here a retest of the support is highly likely in the least. Longer-term, the market for CarMax may establish a trading range at these levels that linger until there is evidence the headwinds are weakening or longer. 
