By Peet Serfontein & Hashmeel Suka.
CarMax is the largest specialty used-car retailer in the US. The group buys, reconditions, and sells cars, vans, light trucks as well as electric vehicles through ~240 superstores in 100-plus television markets. CarMax sells more than 800 000 used cars per year. In addition, the company offers rental, maintenance, repair, and cosmetic-upgrade services.
Growth over the past five years has been somewhat mixed - on an average annual basis, revenue has increased 11.6%, though adjusted earnings has decreased 2.9%. FY22 was a particularly strong year (revenue: +68%, adjusted EPS: +54%), with robust vehicle sales volumes aided by a new online user interface as well as its finance offering. This reversed in FY23 due to lower sales margins amid a tight second-hand market.
Technically, the stock is trading in an inclining channel pattern (refer to the first chart), characterised by an upwards trend between two parallel lines. The upper line is the resistance level, while the lower line is support. The channel pattern suggests that the stock price may continue to rise in the medium-term and specifically, we expect the price to bounce toward the upper boundary of the pattern near term.
The stock is trading just below its 200-day simple moving average of ~$74, making this a contrarian trade.
Emerging upside momentum, according to the MACD indicator as well as sidewards movement of the on-balance volume indicator, supports a bullish stance.
Share Information
| Share Code | KMX US |
|---|---|
| Industry | Automotive Retail |
| Market Capital (USD) | 11.58 billion |
| One Year Total Return | -1.58% |
| Return Year-to-Date | -4.48% |
| Current Price (USD) | 73.30 |
| 52 Week High (USD) | 87.50 |
| 52 Week Low (USD) | 55.77 |
| Financial Year End | February |
| The stock price has made a decent recovery over the past two weeks (+9%). Various technical indicators suggest further upside to come. |
Consensus expectations
(Bloomberg)
| FY22 | FY23E | FY24E | FY25E | |
|---|---|---|---|---|
| Headline Earnings per Share (USD) | 3.03 | 3.02 | 3.51 | 4.31 |
| Growth (%) | -0.30 | 16.05 | 22.90 | |
| Dividend Per Share (USD) | - | - | - | - |
| Growth (%) | - | - | - | |
| Forward PE (times) | 21.06 | 17.20 | 17.01 | |
| Forward Dividend Yield (%) | - | - | - | |
| Recent growth for the company has been soft. However, a strong rebound is expected over the medium- to long-term. | ||||
Buy/Sell Rationale
Technical Analysis:
Long-term fundamental view:
| Share Name and position | J - Profit Take (Close the position) |
XLP - Time Exit (Close the position) |
GILD - Stop Loss (Close the position) |
|---|---|---|---|
| Entry | 133.83 | 70.66 | 80.00 |
| Current | 143.17 | 73.79 | 73.80 |
| Movement | 7% | 4.4% | -7.8% |
| We suggest taking an early profit on this trade. | We have reached the intended time-to-exit for this trade and have closed the position. | The stock price has dropped to our intended stop-loss level, and we have closed the trade. |
| Share Name and position | HSY - Buy (Continue to hold) |
CARZ - Buy (Continue to hold) |
CVX - Buy (Continue to hold) |
|---|---|---|---|
| Entry | 191.47 | 53.61 | 147.89 |
| Current | 202.31 | 55.99 | 154.06 |
| Movement | 5.7% | 4.4% | 4.2% |
|
The formation of a fifth wave (per Elliot wave analysis) in the stock price remains attractive. The stock remains below its 200-day moving average and we maintain a counter-trend strategy. Upside momentum is supportive.
Our profit target remains at $220, with a trailing stop-loss at $195. Exit the trade by 26 April 2024. |
An incomplete symmetrical triangle pattern remains of interest. The ETF remains just above its 200-day moving average. Fading upside price momentum is still a concern.
Our profit target remains at $60, with a trailing stop-loss at $53.90. Exit the trade around 22 May 2024. |
The stock price is holding above the key support level, and this remains attractive. Upside price momentum is supportive.
Our profit target is $167, with a stop-loss of $147.40. Exit the position around 28 June 2024. |
