We recently compiled a list of the 7 Best Auto and Truck Dealership Stocks to Buy. In this article, we are going to take a look at CarMax, Inc. (NYSE:KMX) against the other auto and truck dealership stocks.
US Car and Truck Dealership Market
The auto dealership market is one of the key segments of the greater automotive industry. According to a report by Verified Market Research, the auto dealership industry was valued at $257.30 billion in 2023. The market is forecasted to grow at a compound annual growth rate of 4% to reach $338.6 billion by 2030.
The auto dealership market is a consumer-centric industry, which revolves around customer confidence, inflation rates, interest rates, and the overall regulatory environment. According to a press release by Reuters on July 26, the US car market is facing headwinds due to weak prices, high inventories, and difficulties in logging profits.
The slowed market environment has hit shares of major auto manufacturers and car dealerships nationwide. On top of the macro environment challenges, the market was hit by cyber attacks in June 2024. On June 20, CNN reported that the US and Canadian dealership market stood still due to a cyber attack incident at a data provider called CDK Global. CDK Global data is used by more than 15,000 auto dealers across all major countries. While not all auto dealers use CDK to process orders, those that did faced slower sales growth during the quarter.
As per Reuters, the overall new vehicle sales throughout the US in June 2024 stood at 1.32 million units, representing a seasonally adjusted annualized rate of 15.29 million units during the year. Moreover, affordability also remains one of the key concerns for the market, due to which inventories are not expected to advance as strongly as they did over the past 12 months.
Looking ahead, according to the latest Cox Automotive Dealership report on June 10, the Cox Automotive Dealer Sentiment Index (CADSI) remained stable from the first quarter to the second quarter of 2024. The current market index score for Q2 is 42, which suggests that US auto dealers perceive the market to be weak. For context, the score was 45 a year ago and below the threshold of 50. Moreover, the current market expectation shows a decline in market expectations for the next three months, as the market outlook has dropped from a score of 51 in Q1 to 44 in Q2. The downward trend is attributed to the weaker tax refund season and the ongoing political instability due to elections. To read more about the automotive industry you can look at the 7 Best Small Cap Automotive Stocks to Buy.
Our Methodology
To compile our list of the 7 best auto and truck dealership stocks to buy, we used the Finviz stock screener. We selected Auto & Truck Dealership industry to get a consolidated list of stocks. Next, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q1 2024. The list is in ascending order of the number of hedge fund holders for each stock.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
CarMax, Inc. (NYSE:KMX)
Number of Hedge Fund Holders: 42
CarMax, Inc. (NYSE:KMK) is a retailer of used vehicles and related products in the United States. The company operates through Sales Operations and Auto Finance. The Sales Operations segment offers a wide range of used vehicles from domestic to premium luxury vehicles, and vehicle repair services. The Auto Finance segment engages in alternative financing for retail customers. CarMax, Inc. (NYSE:KMX) was held by 42 hedge funds during Q1 2024, and their total stake was $1.55 billion.
One of the competitive advantages of the company lies in its robust supply chain and inventory management capabilities. During the fiscal first quarter of 2025, the company achieved record vehicle sourcing and was able to acquire around 35,000 cars from dealers, up 70% year-over-year. A strong inventory dictates the company’s ability to manage its inventory and maintain prices competitively for its customers. Moreover, the Auto Finance segment also contributed greatly to overall profitability by growing 7% year-over-year regardless of the challenging lending market.
CarMax, Inc. (NYSE:KMX) faced some challenges during the quarter. Its total sales were down 7% and amounted to $7.1 billion. The decline in sales was primarily due to a 3.1% decrease in retail unit sales and a dip in the average selling price of vehicles, which as per management declined by around $700. There were a series of challenges by the overall market as well arising from consumer affordability challenges, high inflation, and interest rates. However, regardless of these challenges, the company was able to maintain its Gross Profit per Unit (GPUs). Wholesale GPUs were recorded to be at $1,064, a slight increase from $1,042 in the same period last year. Looking ahead, the company is focusing on enhancing its omni-channel platform, expanding its vehicle sourcing, and implementing cost-saving measures.
If you look at the company’s 10-year history, you will find that CarMax, Inc. (NYSE:KMX) has done well to grow its revenue by 8% and levered free cash flow by 11% over the past decade. That’s decent growth.
Giverny Capital Asset Management stated the following regarding CarMax, Inc. (NYSE:KMX) in its Q2 2024 investor letter:
Our holding CarMax, Inc. (NYSE:KMX) continues to scuffle along in what is a very challenging market for used cars, because of both high interest rates and a lack of supply of late model used cars after supply chain issues slowed production in the COVID-19 years. A typical monthly payment on a good used car is more than $100 per month higher today than pre-pandemic, with about two-thirds of that attributable to higher auto prices and one-third to higher interest rates on loans. The company noted in a recent meeting with investors that annual sales of used cars aged 0-6 years have fallen from about 15 million to 12.3 million, down 18%, over the past couple of years. Lately, it appears that sales of late model used cars have begun to improve. If the trend holds, CarMax ought to see much better results.
Overall KMX ranks 2nd on our list of the best auto and truck dealership stocks to buy. You can visit 7 Best Auto and Truck Dealership Stocks to see the other auto and truck dealership stocks that are on hedge funds’ radar. While we acknowledge the potential of KMX as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than KMX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.