Can CarMax Get Back to $100 Post-Covid?

KMX: CarMax logo
KMX
CarMax

Comparing the trend in CarMax’s stock (NYSE: KMX), a used car retailer, over recent months with its trajectory during and after the Great Recession of 2008, we believe that the stock can potentially gain 6% to levels around $95, once fears surrounding the coronavirus outbreak are put to rest. In the current situation, the used-car industry is struggling due to fewer customers and declining used-car values. Given the Hertz bankruptcy, several thousand cars could be flooded into this market – which could send car prices even lower. The used car business is already depressed since the Covid-19 shut down, due to reduced prices, low demand, and increased inventory. In fact, trends may also take a long time to bounce back now that a lot of people have started to work from home.

A detailed comparison of CarMax performance vis-à-vis the S&P 500 is available in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did CarMax Stock Fare Compare With S&P 500?

At the end of January, the World Health Organization (WHO) declared a global health emergency in light of the coronavirus spread. The rally in the equity market continued till February 19 with the S&P 500 reaching a record high, but the trend reversed sharply over the following weeks. KMX stock lost 52% of its value (vs. about a 34% decline in the S&P 500) between February 19 and March 23. A bulk of the decline came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Notably, though, the multi-billion dollar stimulus package announced by the U.S. government has helped the stock price recover 87% over recent weeks (vs. about 40% gain in the S&P 500) to its current level of close to $89.

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CarMax Stock Fell Because The Situation On The Ground Had Changed

CarMax’s physical store footprint was mostly shut down through much of the lockdown period, leading to mass furloughs. In the recent Q1 ended May, approximately 80% of its selling days were negatively affected by store closures and limited operations. CarMax’s revenues dropped 40% year-over-year (y-o-y) to $3.2 billion, still topping analysts’ estimates of $2.7 billion. Further, its earnings plunged a substantial amount from the previous year’s $1.59 per share, down to $0.03 per share. In addition, Comparable-store used unit sales declined by 42% y-o-y during the first quarter, but the company stated that its sales improved consistently since early April.

The differentiating factor for CarMax was the roll-out of its digital platform by the time the pandemic hit. This helped it offset some of the pressure from reduced customer traffic and store closures due to social distancing norms. The company succeeded in reducing inventory, moving more of the consumer businesses to its digital sales channels, and made some aggressive cost-cutting moves that sent expenses down 24% in Q1. The company also reduced share repurchases and hiring and marketing spending in order to save some cash.

Now, as the stay-at-home orders are being lifted gradually and the economy seems to be showing signs of recovery – we believe that CarMax can likely see an uptick if people avoid public transport in the post-Covid scenario. But, if signs of coronavirus containment aren’t clear by its upcoming Q2 earnings timeframe, it’s likely that CarMax’s stock is going to see a continued drop when results confirm reality. It should be noted that CarMax booked an $84 million writedown this quarter, and that figure might increase if the recession deepens.

KMX Stock Witnessed Something Similar During The 2008 Downturn

But KMX stock witnessed something similar during the 2008 downturn. KMX’s stock declined from levels of around $20 in October 2007 (the pre-crisis peak) to roughly $9 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 54% of its value from its approximate pre-crisis peak. This marked a higher drop than the broader S&P, which fell by about 51%.

However, KMX’s stock recovered post the 2008 crisis, to levels of over $24 in early 2010, rising by 157% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

Will KMX Stock Recover Similarly From The Current Crisis?

It should be noted that KMX’s stock fell 52% from the market peak on February 19 to the low on March 23 compared to a 54% decline during the 2008 recession. Also, since it has recovered almost 87% over recent weeks – we believe it can potentially recover by another 6% to close to $95 once economic conditions begin to show signs of improving. This marks a partial recovery to around the $100 level KMX stock was before the coronavirus outbreak gained global momentum.

While CarMax’s stock doesn’t have much near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Also, see how the new and used car seller AutoNation’s recent stock performance compared to the 2008 crisis here.

That said, the actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture further. A complete set of coronavirus impact and timing analyses is available here.

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