Since the beginning of 2022, used car prices have been rallying amid strong demand coupled with production challenges and a low supply of new cars. The supply chain issues in the automotive industry have been aggravated by supply chain instability exacerbated by the Russia-Ukraine war. According to research by CoPilot, in the pre-pandemic era, 76% of used vehicles were sold for less than $25,000. But now only 35% of used vehicles fall in that price range. According to the U.S. Bureau of Labor Statistics data, the consumer price index (CPI) for used cars and trucks jumped 40.5% year-over-year.
However, due to slowing consumer demand, the prices of used cars have finally started to decline. The number of used vehicles sold by dealers declined in March by 15% year-over-year, based on the estimates by Cox Automotive. The decline in demand for used cars is expected to keep certain used car companies under pressure in the near term due to their deteriorating fundamentals and bleak growth prospects.
Given these factors, we think fundamentally weak used car stocks CarMax, Inc. (KMX), CarLotz, Inc. (LOTZ), and Carvana Co. (CVNA) are best avoided.
CarMax, Inc. (KMX)
KMX in Richmond, Va., is the leading retailer of used vehicles in the U.S. The company operates through two segments: CarMax Sales Operations; and CarMax Auto Finance. It offers a wide range of makes and models of used vehicles, including domestic, imported, and luxury vehicles and hybrid and electric vehicles. In addition, it provides reconditioning and vehicle repair services. KMX operates more than 230 used car stores.
In its fiscal 2022 fourth quarter, ended Feb. 28, 2022, KMX's selling, general, and administrative expenses increased 22.5% year-over-year to $620.90 million, while its interest expenses grew 32% year-over-year to $26.80 million. Its earnings before income taxes decreased 23.3% from the prior-year period to $201.20 million. The company's net earnings amounted to $159.80 million, representing a 23.9% increase from its year-ago value.
The $8.02 billion consensus revenue estimate for its fiscal 2023 third quarter, ending Nov. 30, 2022, represents a 6% year-over-year decline from the prior-year period. The $1.61 consensus EPS estimate for the current quarter ending May 31, 2022, represents a 38.7% year-over-year decline from the year-ago value.
The stock has declined 15.8% in price over the past six months and 33.3% over the past year. It closed yesterday's trading session at $88.87. KMX's year-to-date translates to 31.8%.
KMX's POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
KMX has an F grade for Sentiment and a D for Quality and Growth. Within the Auto Dealers & Rentals industry, it is ranked #23 of 24 stocks.
To see KMX's POWR Ratings for Stability, Value, and Momentum, click here.
CarLotz, Inc. (LOTZ)
LOTZ operates as a vehicle consignment and retail marketing business. The Richmond, Va., company provides its corporate vehicle sourcing partners and retail sellers of used vehicles access to the retail sales channel. It serves corporate vehicle sourcing partners, including vehicle rental companies, fleet leasing companies, financers wholesalers, third-party remarketers, and original equipment manufacturers.
Last December, LOTZ was being investigated by Brager Eagel & Squire, P.C., a nationally recognized shareholder rights law firm, on behalf of long-term stockholders following a class action complaint. The investigation concerns whether the board of directors of LOTZ breached their fiduciary duties to the company’s shareholders.
LOTZ's total operating expenses increased 422.7% year-over-year to $33.82 million in its fiscal year 2021 fourth quarter, ended Dec. 31, 2021. The company's loss from operations grew 687.8% year-over-year to $31.45 million, while loss before income tax expense rose 226.3% year-over-year to $14.17 million. LOTZ's net loss and net loss per share came in at $14.18 million and $0.12, respectively, registering increases of 226.6% and 71.4%, respectively, from the prior-year period.
Analysts expect LOTZ's loss per share to amount to $0.26 for its fiscal year 2022 first quarter, ended March 31, 2022, representing a 73.3% year-over-year rise. It is no surprise that the company has missed the consensus EPS estimates in three of the trailing four quarters.
Shares of LOTZ have slumped 59.6% in price year-to-date and 88.1% over the past year. It closed yesterday's trading session at $0.92.
LOTZ's POWR Ratings reflect its poor prospects. The company has an overall D rating, which translates to Sell in our proprietary rating system.
The stock has a D grade for Quality, Stability, and Growth. It is ranked #22 of 24 stocks in the Auto Dealers & Rentals industry.
To see additional POWR Ratings (Sentiment, Value, and Momentum) for LOTZ, click here.
Carvana Co. (CVNA)
CVNA in Phoenix, Ariz., operates an e-commerce platform for buying and selling used cars in the U.S. The company's online platform and transaction technologies allow customers to research a vehicle, inspect it using its 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase a vehicle, and schedule the delivery or pick-up. CVNA's in-house distribution network serves more than 211 metropolitan markets.
Yesterday, CVNA announced a size increase and pricing of $3.28 billion in notes due 2030. The offering was upsized from $2.28 billion. The notes will bear a 10.3% coupon, which is payable semi-annually on May 1 and November 1 each year. The notes offering is expected to increase the company's debt and interest burden.
In its fiscal year 2022 first quarter, ended March 31, 2021, CVNA's gross profit declined 11.8% year-over-year to $298 million. Its selling, general, and administrative expenses increased 83.1% year-over-year to $727 million. Its net loss before income taxes rose 517.1% from the prior-year period to $506 million. In addition, its net loss attributable to CVNA and net loss per share of Class A common stock came in at $260 million and $2.89, respectively, registering an increase of 622.2% and 528.3% from the prior-year period.
The Street expects CVNA's loss per share to amount to $6.61 for fiscal 2022, representing a 305.5% year-over-year rise. The company has missed the consensus EPS estimates in three of the trailing four quarters.
The stock has decreased 71.6% in price year-to-date and 77.2% over the past year. It closed yesterday's trading session at $65.74.
CVNA's POWR Ratings reflect this bleak outlook. It has an overall rating of F, which translates to a Strong Sell in our POWR Ratings system.
CVNA has a grade of F for Stability, Quality, and Sentiment. The stock has a D grade for Growth. It is ranked #70 of 71 stocks in the F-rated Internet industry.
Click here to see CVNA's POWR Rating for Value and Momentum.
KMX shares were trading at $87.92 per share on Thursday morning, down $0.95 (-1.07%). Year-to-date, KMX has declined -32.49%, versus a -11.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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