ZACKSยท2025-04-02 15:15Group 1: Industry Overview - U.S. President Trump is imposing 25% tariffs on imported cars and key auto parts, expected to disrupt the auto industry and strain supply chains, leading to higher vehicle prices and potential demand weakening [1] - The rising prices of new cars may drive consumers to the used car market, initially benefiting the used car industry before potential price increases occur [1] Group 2: CarMax Analysis - CarMax, the largest used vehicle retailer in the U.S., retailed 765,572 used vehicles in fiscal 2024, down over 5% year over year, with revenues declining from $20.9 billion to $20.3 billion in the first three quarters of fiscal 2025 [2][5] - The company is investing in strategic initiatives to enhance operations, including opening more offsite reconditioning and auction locations, and has seen a 50 basis points year-over-year improvement in retail used vehicle gross margin to 8.7% [3][2] - CarMax repurchased 4.3 million shares in the first three quarters of fiscal 2025, with $2.04 billion remaining under its buyback authorization, reflecting strong capital return policies [4] Group 3: CarMax Financial Concerns - CarMax's cash position of $271.9 million is overshadowed by $1.59 billion in long-term debt, resulting in a debt-to-capital ratio of 0.75, significantly above the auto sector's average of 0.34 [5] - Sales growth remains sluggish, prompting the company to push back its 2 million-unit sales target from 2026 to as late as 2030, with an overall gross margin of 10.5% lagging behind the industry average of 28% [5] Group 4: Carvana Analysis - Carvana, the second-largest used car retailer in the U.S., has seen retail sales volumes rise, selling over 100,000 cars in each of the last three reported quarters, with a 50% year-over-year increase in retail units sold in the final quarter of 2024 [7] - The company achieved record adjusted EBITDA of $1.4 billion in 2024, with a 10.1% adjusted EBITDA margin, and anticipates further gains in 2025 supported by cost efficiencies and operational improvements [8] Group 5: Carvana Operational Improvements - Carvana has reduced costs related to retail reconditioning and inbound transport by in-sourcing services and optimizing logistics, which has expanded its retail gross profit per unit [9] - The acquisition of ADESA's U.S. operations has enhanced Carvana's logistics and reconditioning processes, increasing its reconditioning capacity from 1.3 million to a potential 3 million units annually [10] Group 6: Carvana Financial Concerns - Carvana carries $5.26 billion in long-term debt against $1.72 billion in cash, with a debt-to-capital ratio of 0.8, posing financial risks despite a recent debt restructuring deal [11] Group 7: Price Performance and Valuation - Year to date, Carvana shares have risen more than 4%, while CarMax stock has lost 3.5% [12] - Carvana's forward sales multiple is 2.54X, significantly above its median of 0.69X, while CarMax's forward sales multiple sits at 0.45X, slightly above its median of 0.43X [15] Group 8: Growth Outlook - The Zacks Consensus Estimate for Carvana's 2025 sales and EPS implies year-over-year growth of 23% and 119%, respectively, while CarMax's fiscal 2026 sales and EPS estimates imply a year-over-year increase of 3.4% and 17% [14][16] - Carvana's superior growth trajectory, expanding margins, and strong sales momentum make it a more compelling investment choice compared to CarMax, which faces sluggish sales growth and lingering financial concerns [17][18]