CarMax is the right play for the auto sector boom, this investor says

A chip shortage may have put the brakes on production numbers across the auto sector but demand is only expected to accelerate as economies begin to reopen with the onset of vaccinations. That makes for a strong case for test driving stocks in the pre-owned vehicle market, says portfolio manager Michael Hakes, who thinks investors should be kicking the tires on a name like CarMax (CarMax Stock Quote, Chart, News, Analysts, Financials NYSE:KMX).

“CarMax has been around with that used car model but they’ve become way more sophisticated, especially with their digital and online presence,” says Hakes, senior portfolio manager at the Murray Wealth Group, who spoke on BNN Bloomberg on Tuesday.

“They’ve been able to offer cars very attractively online where you can see the car and you can see every ding on the car that you’re buying. And they offer guarantees about how good or in shape the car is,” he said.

“The company is expecting to grow revenues by now probably high single-digits going forward,” Hakes said.

CarMax, the industry leader in the US with 220 stores, 25,000 employees and 750,000 used vehicles sold in 2020, is expected to deliver its first quarter fiscal 2022 earnings on Friday, with investors hoping for a repeat of recent quarters where the company beat analysts’ consensus estimates on earnings. CarMax delivered $1.42 per share for its Q3 2021 compared to the Street’s $1.11 per share call, while in March the company’s Q4 2021 featured $1.27 per share in earnings compared to the expected $1.24 per share. (All figures in US dollars.)

“We are extremely proud of what we have accomplished this year and how the strategic changes we have made to our business position us for accelerated growth across retail, wholesale and CarMax Auto Finance,” said president and CEO Bill Nash in CarMax’s fourth quarter 2021 press release in March.

“Our omni-channel experience and Love Your Car Guarantee further enhance the most customer-centric offering on the market today. Additionally, the rapid adoption of our online instant appraisal offer positions us to become the largest online buyer of used autos from consumers,” Nash said.

Net sales for the Q4 increased by 4.1 per cent year-over-year to $5.164 billion, while for the full 2021, sales were down 6.7 per cent to $18.950 billion for its fiscal 2021.

Last year, the impact of the pandemic on the auto sales across the board was evident, while industry experts are predicting a return to form in 2021. CarMax said earlier this month that it would be hiring 1,800 more automotive service professionals to help meet rising demand across the country, with the company saying its metrics point to a healthy demand for used vehicles due to factors such as tax refunds and stimulus cheques lining consumers’ pockets and the improved weather conditions helping to make car-buying more attractive.

Hakes says the industry-wide shift to electric vehicles (EVs) could also be a tailwind for names like CarMax.

“It’s a competitive market. And [CarMax] is not cheap being 20x earnings, slightly lower than the market probably because it fits into that very small niche,” Hakes said. “Maybe there’s a rush to buy [internal combustion engine] cars, relatively inexpensive ICE cars, as we go forward because maybe the [electric vehicles] are too expensive and the range is not yet good enough for people who like to travel more than a couple hundred kilometres a day.”

CarMax’s share price took an initial deep dive like the rest of the market last February and March but while the stock fairly quickly pulled its way out of that hole, the back half of 2020 was relatively flat. An early-year jump has helped KMX stay in the black so far in 2021 with a year-to-date return of 24 per cent.

Hakes said Carvana (NYSE:CVNA) might be another good investment choice in the US used car space.

“The sell-side has a 20-per-cent target return on CarMax with a $140 target, [with] about 15 sell-side analysts that cover this,” Hakes said.

“I wouldn’t be completely against owning a CarMax but I’d look at Carvana because they also have a very competitive offering,” he said.

CarMax’s Nash said the company is expecting strong growth in its fiscal 2022.

“We think that the past investments, our current investments, our ability to quickly innovate, innovate on things like the online appraisal, innovate on things like self-serve, that will create an omni-channel experience and a value proposition that’s really unrivalled in the car industry and will allow us to capture an increased market share,” Nash said in the company’s fiscal fourth quarter earnings call.

For the upcoming fiscal first quarter, the Zacks consensus estimates for KMX are earnings of $1.61 per share on revenues of $6.19 billion.