24 BARRON’S August 3, 2020
record highs, consumers increasingly are
opting for lightly used vehicles. CarMax
also runs a wholesale auction business.
While sales dried up in the early days of
the pandemic, they’ve improved since
April. Sales in the first two weeks of June
were within 10% of last year’s, CarMax said
in its latest update.
C
arMax faces stiffer competition from
digital dealerships, but it also has
advantages: Like AutoNation, it
sources many more vehicles from
consumer trade-ins than from auctions.
The company reported gross profit per unit
(including service, financing fees, and auc-
tion sales) of $3,270 in its latest full fiscal
year (versus $2,852 for Carvana).
CarMax may also have an edge as the
average age of used vehicles increases. With
declines in vehicle production, there won’t be
as many one-to-three-year old cars for sale
over the next few years, says Murphy. Older
vehicles are tougher to price and need more
reconditioning, benefitting a full-service
operation like CarMax. “For that, you want a
knowledgeable dealership that isn’t just
playing the trading game for commodity-like
assets,” he says.
CarMax looks pricey, based on 2021
earnings multiples. But Murphy sees 30%
upside in the stock, assigning it a $130
target based on a multiple of 20 times 2022
profits, the mid-point of the shares’
historical range. CarMax is transitioning
from a traditional to an “omni-channel”
retailer, including more digital sales, which
should improve profitability, lift its
addressable market, and generate more cost
savings. Massive lots, packed with vehicles
for sale, might look like relics of a pre-
pandemic era, but they aren’t driving away
anytime soon.B
suspended at the end of the first quarter.
Group 1’s stock looks even cheaper,
partly because of its heavy exposure to
Texas and Oklahoma—states hit hard by
the energy downturn and recent spikes in
coronavirus cases. Group 1 also operates
dealerships in the United Kingdom and
Brazil; they accounted for 14% of sales in
the second quarter—and pose another risk.
The company booked “asset impairments”
of $1.11 a share in the quarter.
While revenue fell 29% from the level in
2019’s second three months, the company
said its U.S. business recovered steadily in
May and June, fueled by used car sales and
service. It also benefited from its online
shopping platform, Acceleride, as digital
sales accelerated.
The energy sector, while critical to
Texas’ health, has become less of an
economic driver as the state has diversified
its economy. Group 1 has invested heavily
in online sales via Acceleride, and is seeing
steady growth in parts and service, and at
its collision centers. Combined, these three
account for nearly half of gross profits. One
of the biggest obstacles to services growth
is a shortage of technicians, but Group 1
recently launched an innovative, four-day
work week, helping reduce turnover and
boost employment. “That should translate
into meaningful parts and services growth
at attractive margins,” says Morgan Stanley
analyst Armintas Sinkevicius.
Trading at seven times 2021 profits, the
stock is well below the average multiple of
nine times earnings for traditional dealers.
Benchmark’s Ward expects it to hit $130
over the next 12 months, valuing it at 11
times earnings, about average historically.
CarMax should benefit from the
strength of pre-owned vehicles in the
recession. With new-car prices hitting
OntheLot
Traditional and digital dealerships trade at wide valuation gaps. The traditional dealers may
offer more value.
Recent Market 2021E 2021E 52-Week
Company / Ticker Price Value (bil) P/E Price/Sales Range
AutoNation / AN $54.15 $4.7 9.5 0.2 $20.59 - $57.09
Plans to build 20 used-car dealerships and expand sales through digital channels
CarMax / KMX 98.68 16.1 19.9 0.8 37.59 - 103.18
The largest used-car dealership is riding a wave of demand for pre-owned vehicles
Group 1 Automotive / GPI 89.12 1.6 7.3 0.1 26.25 - 110.11
Exposure to hard-hit areas has hurt the stock, but investments in service should pay off as sales rebound.
Carvana / CVNA 155.46 24.8 N/A 3.6 22.16 - 156.33
Digital dealer’s sales are surging as car buying moves online; shares trade like a high-growth tech stock.
Vroom / VRM 55.00 6.5 N/A 2.4 38.46 - 60.91
A pure online model sent shares soaring after June’s initial offering. Profits aren’t expected until 2022.
Note: Estimates for calendar year. E=Estimate. N/A=Not applicable Sources: Bloomberg; FactSet
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