We recently published a list of The 7 Best Auto and Truck Dealership Stocks to BuyIn this article, we compare CarMax, Inc. (NYSE:KMX) with other car and truck dealers.

US car and truck dealer market

The auto dealership market is one of the key segments of the entire automobile industry. According to a report by Verified Market Research, the auto dealership industry was valued at $257.30 billion in 2023. The market is expected to grow at a compound annual growth rate of 4% to reach $338.6 billion by 2030.

The auto retail market is a consumer-driven industry that is concerned with customer confidence, inflation rates, interest rates and the overall regulatory environment. According to a July 26 Reuters press release, the U.S. auto market is facing headwinds due to weak pricing, high inventory and difficulty generating profits.

The slowing market environment has hit the stocks of major automakers and dealerships across the country. In addition to the challenges of the macro environment, the market was hit by cyberattacks in June 2024. On June 20, CNN reported that the U.S. and Canadian auto dealership market had ground to a halt due to a cyberattack incident at a data provider called CDK Global. CDK Global’s data is used by more than 15,000 auto dealerships in every major country. While not all auto dealers use CDK to process orders, those that did saw slower sales growth during the quarter.

According to Reuters, total new car sales in the U.S. in June 2024 were 1.32 million units, a seasonally adjusted annual rate of 15.29 million units year-over-year. In addition, affordability continues to be one of the market’s top concerns, so inventories are not expected to rise as much as they have over the past 12 months.

Looking ahead, according to the June 10 Cox Automotive Dealership report, the forecast remained stable from the first to the second quarter of 2024. The current market index reading for the second quarter is 42, indicating that U.S. auto dealers perceive the market as weak. For comparison, a year ago, the reading was 45, which is below the threshold of 50. In addition, the current market expectation shows a decline in market expectations for the next three months, as the market outlook has dropped from a reading of 51 in the first quarter to 44 in the second quarter. The downward trend is attributed to the weaker tax refund season and ongoing political instability due to the election. To learn more about the automotive industry, you can check out the 7 best small-cap automotive stocks to buy.

The story goes on

Our methodology

To compile our list of the 7 best Auto & Truck Dealership stocks to buy, we used Finviz’s stock screener. We selected the Auto & Truck Dealership industry to get a consolidated list of stocks. Next, we selected and ranked the stocks most held by institutional investors as of Q1 2024. The list is in ascending order of the number of hedge fund holders for each stock.

Why do we care what hedge funds do? The reason is simple: Our research shows that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (read more details here).

CarMax, Inc. (NYSE: KMX)

Number of hedge fund owners: 42

CarMax, Inc. (NYSE:KMK) is a retailer of used cars and related products in the United States. The company operates through Sales Operations and Auto Finance divisions. The Sales Operations division offers a wide range of used cars from domestic to premium luxury vehicles, as well as vehicle repair services. The Auto Finance division offers alternative financing to retail customers. CarMax, Inc. (NYSE:KMX) was held by 42 hedge funds in the first quarter of 2024 and their total stake was $1.55 billion.

One of the company’s competitive advantages lies in its robust supply chain and inventory management capabilities. In the first quarter of fiscal 2025, the company achieved a record in vehicle procurement and was able to acquire around 35,000 cars from dealers, a 70% year-on-year increase. Strong inventory determines the company’s ability to manage its inventory and keep prices competitive for its customers. In addition, the auto finance segment also contributed significantly to the overall profitability by growing 7% year-on-year despite the difficult credit market.

CarMax, Inc. (NYSE:KMX) faced some challenges during the quarter. Total revenue declined 7% to $7.1 billion. The revenue decline was primarily due to a 3.1% decline in retail sales and a decline in the average selling price of vehicles, which management said fell by around $700. The overall market also faced a number of challenges arising from the affordability of vehicles to consumers, high inflation, and interest rates. However, despite these challenges, the company was able to maintain its gross profit per unit (GPUs). Wholesale GPU price came in at $1,064, a slight increase from $1,042 in the same period last year. Looking ahead, the company is focused on improving its omnichannel platform, expanding its vehicle sourcing, and implementing cost-saving measures.

If you look at the company’s 10-year history, you’ll see that CarMax, Inc. (NYSE:KMX) has grown its revenue by 8% and free cash flow by 11% over the past decade. That’s decent growth.

Giverny Capital Asset Management stated the following about CarMax, Inc. (NYSE:KMX) in its second quarter 2024 investor letter:

KMX total place 2 on our list of the best auto and truck dealer stocks to buy. You can visit The 7 best auto and truck dealer stocks to see the other auto and truck dealer stocks that are on hedge funds’ radar. While we recognize KMX’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than KMX but trades at less than 5 times its earnings, read our report on the cheapest AI stock.

CONTINUE READING: Analyst sees a new $25 billion “opportunity” for NVIDIA And Jim Cramer recommends these 10 stocks in June.

Disclosure: None. This article was originally published on Insider Monkey.