Will Rising Car Loan Delinquencies Drive Down CarMax Earnings In Q3?

Used car retailer CarMax, Inc KMX is set to report its third-quarter earnings on December 20, and Wedbush anticipates earnings below consensus as higher loan delinquencies in CarMax Auto Finance (CAF) is expected to weigh on the results.

Expectations

Analyst Seth Basham sees EPS of $0.69 estimate versus consensus of $0.70 and buy-side expectations in the low $0.70s. Basham, however, raised his third-quarter comp estimate from 3 percent to 5 percent versus the Street's view of 3.6 percent and buy-side expectations in the 5–6 percent range.

Justification

Though comps likely improved in the third quarter on a one-year basis, the analyst said it deteriorated on a two-year stacked basis. Further, the company is being pressured by tighter financing terms and availability and increasing off-lease vehicles.

“CAF income declines, along with wholesale segment pressures and higher SG&A, point to more downside than upside risk for KMX shares upon 3Q earnings,” Basham wrote in a note.

The analyst expects CarMax’s used unit comps and gross profit comps to remain under pressure on lower used car prices, fading of credit tailwinds and tough competition, making this a “less-than-ideal time to invest in KMX shares.”

“[O]ur view that KMX's model is imperfect for the paradigm shift in consumer used car shopping behavior, but the friction for KMX to adapt is significant,” Basham highlighted.

At last check, shares of CarMax rose 1.43 percent to $63.71. Basham has a Neutral rating on CarMax shares, with a price target of $55.