Yahoo Finance CarMax stock is popping on earnings, but investors may be overlooking some red flags
The used car retailer has some concerns that investors shouldn't lose sight of.
The Federal Reserve's aggressive interest rate increases over the past year continue to put speed bumps in front of auto dealers.
And investors may want to proceed with caution when it comes to shares of industry leader CarMax (KMX) despite the enthusiastic response to a surprise earnings beat on Tuesday.
"We believe vehicle affordability challenges continued to impact our fourth quarter unit sales performance, as headwinds remained due to widespread inflationary pressures, climbing interest rates, tightening lending standards and prolonged low consumer confidence," CarMax said in its earnings release on Tuesday.
The effects of those challenges were littered through the auto dealer's financial statements.
CarMax stock managed to pop 10% as of Tuesday afternoon on a 24-cent earnings beat. But the red flags in the results and broader car market are hard to overlook.
Combined retail and wholesale used vehicle unit sales plunged 15.5% from a year ago to 290,214. The company purchased 22.5% fewer vehicles from consumers and dealers in the quarter as a result of the weakening demand backdrop.
The company's financing business saw income tank by 36.1% from last year. What's more alarming is that there were signs that car shoppers simply took on too much of a car payment for the current land of higher interest rates.
CarMax said the allowance for loan losses was 3.02% of ending managed receivables, up from 2.95% as of Nov. 30, 2022. The retailer blamed "uncertain macroeconomic" conditions and a continued expansion into lower credit quality customers.
CarMax pointed out it's now tightening its lending standards amid the rise in loan losses.
"A headline beat on low expectations, though quality is questionable, and we continue to expect downward revisions to FY24/FY25 estimates," JPMorgan analyst Ryan Brinkman wrote in a client note.
Meanwhile, new vehicle affordability continues to be low, Cox Automotive data notes, due to the rise in interest rates and worker wages not keeping pace with inflation.
"To put the payment in perspective, the typical American household can afford a car payment of around $400 a month," Cox Automotive chief economist Jonathan Smoke said. "With an average monthly payment of nearly twice that, the new-vehicle market remains heavily skewed toward the most affluent buyers.”
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations or anything else? Email brian.sozzi@yahoofinance.com
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