Goldman Previews Auto Retailer Earnings, Favors CarMax Over AutoZone

Following three months of erosion, CarMax, Inc KMX likely witnessed stable credit metrics in August, in-line with seasonal averages, Goldman Sachs’ Matthew J. Fassler said in a report. On the other hand, AutoZone, Inc. AZO may have been impacted by unfavorable weather conditions, although the shortfall is unlikely to be significant.

CarMax

Analyst Fassler maintained a Buy rating on the company, with a price target of $63. He added, “We are encouraged by stable credit metrics, especially after three months of erosion.”

Some volatility had been expected after the company’s Q1 earnings report which revealed a higher loan loss provision. For the upcoming Q2 earnings report, the recent upturn in residual values, as indicated by the Manheim index, “could drive some respite for recovery rates,” Fassler mentioned.

Moreover, concerns around the rapid profit erosion has been addressed by improved spreads on CarMax’s latest ABS. “Our estimates already reflect a drag for the next year or so as KMX cycles off lucrative securitizations executed at a less competitive moment in the auto finance cycle,” the analyst wrote.

Fassler expressed optimism regarding the company’s long-term growth prospects and sales visibility from off-lease supply, while adding that the stock had a compelling valuation versus historical levels.

AutoZone

The analyst maintained a Neutral rating on the company, with a price target of $841. AutoZone’s shares have significantly underperformed the market, after investor focus turned to the auto parts effort being made by Amazon.com, Inc. AMZN.

“While we stand nominally below consensus for sales/earnings, we are close and do not expect the kind of shortfall that would support multiple compression for AZO. We expect some residual pressure from a mild winter and a mild start to summer, which would have pressured AZO early in its lengthy quarter (16 weeks)… but do not anticipate a meaningful shortfall,” the Goldman Sachs report stated.

Although AutoZone delivered sub-seasonal results in the prior quarter, the Q4 sales estimate reflects sequential trends that are consistent with recent years. Fassler added, “Long term, we continue to expect AZO to emerge with its algorithm intact, as growth in imports helps drive merchandise margin, and the company manages costs judiciously even as it ramps its supply chain investment.”

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