Leave CarMax Stock on the Lot For Now (KMX)

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Welcome to the Stock of the Day.

Shares of CarMax (KMX) stock retreated after the used automobile retailer reported 9% fourth-quarter sales growth and a billion-dollar increase to its ongoing stock buyback program. Huh? What spooked investors? And is this a buying opportunity for CarMax stock or a sign that CarMax is stopped at a red light?

Find out now.

Company Profile

CarMax is a major retailer of used vehicles in the United States. It also sells vehicles that do not meet its retail standards to licensed dealers through on-site wholesale auctions, as well as sells new vehicles under franchise agreements.

In addition, the company provides customers financing alternatives through its finance operation, CarMax Auto Finance, as well as through its third-party financing providers. At time of writing this, CarMax operates 123 used car superstores in 61 markets. Based in Richmond, Virginia, the company was founded in 1993.

Earnings Rundown

For the fiscal fourth quarter, CarMax earned $99.2 million, or 44 cents per share, on $3.08 billion in sales. Compared with the year ago quarter, this represents 9% annual sales growth and a 7.5% drop in earnings.

Analysts had forecast $3.18 billion in sales so CarMax missed the sales estimate by a hefty margin. Not even the firm’s announcement that it’s boosting its stock buyback program buy $1 billion could restore investor confidence in KMX.

After all, the company is expected to experience margin compression over the next few quarters. Next quarter, the analyst community expects just 9.4% top-line growth and 6.3% bottom-line growth. This is well below the industry average of 45.8% forecast earnings growth.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. When it comes to institutional buying pressure, which measures a stock’s risk-to-return ratio, CarMax stock has it rough. It earns a D for its Quantitative Grade.

Meanwhile, the company could stand to improve some of its fundamental metrics, including operating margin growth (C), earnings momentum (C), and earnings surprises (D). The other five measures currently earn Bs, but that may change once the latest quarterly results are plugged in. KMX receives a C for its Fundamental Grade.

Bottom Line: As of this posting I consider CarMax stock a D-rated Sell.

Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!