03 April 2020

Can CarMax Jumpstart its Stalling Business?


What’s happening: CarMax reported stronger-than-expected results for its fiscal fourth quarter, exceeding both revenue and earnings estimates.

What happened: Shares of CarMax jumped more than 7% in pre-market trading, after the country's largest used car dealership reported strong growth in quarterly sales. Gains could not hold, however, as investors turned their attention to uncertainties ahead for the company. While investors fear a collapse in demand due to the coronavirus outbreak, Wall Street analysts largely recommend buying this stock.

  • CarMax’s fourth-quarter profits surged to $1.30 a share, from $1.13 a share in the same quarter a year earlier. The figure also came in ahead of the consensus estimate of $1.13 a share.
  • The company announced 14.9% growth in quarterly sales to $4.96 billion, exceeding expectations of $4.71 billion.
  • While used vehicle sales grew 14.7%, same-store sales climbed 11.0% during the quarter.

Why it matters: CarMax's robust quarter ended on February 29, just as the US was starting to feel the heat from the COVID-19 pandemic. Although the strong sales momentum continued through the first week of March, investors are concerned about the company’s near-term prospects.

Automotive shares have been hard hit by the virus outbreak, with expectations of a 20% decline in global auto sales. In the automotive industry, used car dealerships could feel more of an impact than automakers, with lower footfall, aging inventory and consumers withdrawing from spending on big-ticket items. And, with CarMax exiting the quarter with $2.8 billion worth of inventory, it is likely to see higher write downs as buying slows.

CarMax’s finance division has managed receivables worth $13.55 billion from auto loans and has already started receiving requests for extending loans since the mid of March.

Management announced various steps to deal with the crisis. Among these were plans to draw down funds from the company’s revolving credit facility. Even after this, CarMax will still have an additional $300 million remaining on the credit facility. Also, the company intends to continue investing in its online channel.

Shares of CarMax have declined almost 50% since mid-February. Wall Street analysts consider this as a good entry point for the stock, recommending investors to take a longer-term view of the company.

What to watch: CarMax has not issued an outlook for the current quarter or year due to COVID-19-related uncertain. Investors will be looking for any projections by the management as well as news of steps taken to handle the crisis.

The Markets Today


The European stocks will be in focus today, ahead of some major economic reports scheduled for release during the session.

Context: European stocks ended slightly higher on Thursday, after being highly volatile throughout the day. While jobless claims data from the US fueled fear among investors, the strong recovery in oil prices was welcomed news.

Details: The US Labor Department reported a record 6.6 million filings for jobless benefits in the week ended March 27.

Meanwhile, oil prices spiked after President Donald Trump said he had spoken with Saudi's Crown Prince and assured markets that Saudi Arabia and Russia will soon announce a reduction in oil production.

The pan-European Stoxx 600 index rose 0.2% in the previous session, with oil and gas stocks among the top performers. Shares of TGS-Nopec, Aker BP and John Wood Group surged more than 9% each on Thursday.

Markets continue to monitor developments related to the coronavirus outbreak. The number of confirmed COVID-19 cases globally exceeded 1,015,700, with the death toll rising to 53,000.

The FTSE 100 rose 0.47%, while German 30 closed 0.27% higher. Bucking the trend, shares of Hays declined 13% after the British company disclosed an emergency equity raise of £200 million and scraped its dividend.

What to watch: Investors are hoping for the ECB (European Central Bank) to take quick and strong actions to deal with the pandemic. Markets also await a basket of economic reports from the region, including services PMI, composite PMI and retail sales.

The IHS Markit Eurozone services PMI is expected to dip to a record low of 28.4 for March, versus a reading of 52.6 in the prior month. Composite PMI is projected to decline to a record low of 31.4 in March. Analysts expect the region’s retail sales to rise 0.1% in February, after 0.6% growth in January.

Other Markets: US indices closed higher on Thursday, with the Dow, S&P 500 and Nasdaq 100 up 2.24%, 2.28%, and 1.72%, respectively.

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What else to watch today


France’s services PMI, retail sales and government budget value, Spain’s industrial production and services PMI, Turkey’s inflation rate and producer prices, South Africa’s Standard Bank PMI, Italy’s services PMI, Germany’s services PMI, UK’s services PMI, India’s foreign exchange reserves, Mexico’s consumer confidence, Brazil’s services PMI, Russia’s consumer confidence as well as the US non-farm payrolls, unemployment rate, services PMI, ISM non-manufacturing PMI and Baker Hughes crude oil rigs.

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