CarMax Cashes in Big on Used Car Surge, Stock to Watch

With used car prices up 29.7% in the last year and the cost of rental cars more than doubling, dealer CarMax is cashing in big. The Richmond, Va.-based company reported that it more than doubled its sales volumes in early 2021 from a year ago. 

CarMax has an expected earnings growth rate of 42.3% for the current year, ending February 2022. The Zacks Consensus Estimate for current-year earnings improved 10.7% over the past week, while the stock price swelled 38.3% year-to-date.

The company is benefiting from this year’s high used car prices. CarMax’s first quarter sales jumped 138%, exceeding analyst expectations. The company more than doubled its unit sales through late May.

In June, the average low-mileage used car cost 3.1% less than its brand new counterpart. In November 2020, used cars were 10.8% less than brand new models, on average, according to data from car-search website iSeeCars.com.

Consumer prices rose 5% for the 12-month period ending in May, up from the 4.2% rise in April, according to data from the labor department. It’s the sharpest increase since August 2008. 

“Our average selling prices were up a couple of thousand dollars,” said CarMax CEO Bill Nash on the company’s first quarter earnings call. “I do think we’re reaching an inflection point. If you look at the consumer price index and the difference between new cars and late-model used cars, that gap has definitely narrowed. While new cars are going up, they have not gone up at the pace of used cars.” 

Used car prices are skyrocketing for a number of reasons. New vehicle production is slowing due to ongoing microchip shortages, which is pushing buyers into the used market. Fewer new models available also means that fewer trade-ins are happening, so the used car supply is not meeting demand. 

“Normally. that pricing environment would be a headwind to just the used car industry in general,” said Nash. “I think the difference this quarter was that because there was a lack of new car availability, I think it pushed customers down into the used car market, which helped to raise the price of used cars.”

CarMax executives admitted that the current market is bolstering sales, but they did not seem concerned about this changing in the near future. 

“There’s some supply constraints out there because you’ve got some different folks doing different things. You also have the demand for maybe some new car customers moving into used cars,” said Nash. “I don’t see a lot changing in supply over the next couple of quarters.”