I wasn’t keen on writing about used car stocks to buy. But then I read an article from early June in the Wall Street Journal that was an interesting take on used car sales.
The Journal’s auto columnist, Dan Neil, argued that consumers have forsaken new vehicles because used cars and trucks are better deals. More importantly, they have old-school designs and features that you can’t get in today’s high-tech machines.
What that means when electric vehicles (EVs) become more commonplace than internal combustion-powered vehicles is anyone’s guess.
But in the meantime, used car stocks aren’t the worst investment to run with in pursuit of profits. The biggest problem for the used car industry right now is getting more vehicles to sell. To exacerbate things, higher interest rates have hurt demand for new and used vehicles. That situation should improve heading into 2025.
In the meantime, used car stocks have been all over the place in 2024. Let’s look at three to buy as more consumers skip buying new ones.
Carmax (KMX)
Carmax (NYSE:KMX) is the country’s largest retailer of used cars and trucks. It sells vehicles from 248 locations across the U.S. In fiscal 2024 (February year-end), it sold nearly $21 billion in used vehicles.
On June 21, CarMax reported its Q1 of 2025 results. They beat analyst estimates for the quarter. The company’s adjusted earnings per share were 97 cents, two cents better than the analyst estimate, while revenues were $7.11 billion, $50 million shy of the consensus.
While the inflated prices for used cars have come down — the Manheim Used Vehicle Value Index, an index that follows used-car pricing, is down about 9% year-over-year (YOY) and 25% from late 2021 peak — its unit sales in the first quarter fell by 3.1%, while the average retail selling price declined by $700, or 2.7% YOY.
Analysts are lukewarm about KMX stock. Of the 21 who cover its stock, 11 rate it a buy, with a target price of $77.50, nearly 10% higher than where it is currently trading.
Based on a 2026 EPS estimate of $3.95, it trades at 18.0x this estimate. Buy now while interest rates are still high.
CarGurus (CARG)
Like CarMax, CarGurus (NASDAQ:CARG) saw revenues fall in the latest quarter ended March 31. Unlike CarMax, it has no physical locations to sell new and used vehicles. CARG operates through its digital auto platform, the top visited auto marketplace in the U.S. Also, it has marketplaces in Canada and the U.K.
In Q1 of 2024, its Marketplace Revenue was $187.2 million, 12% higher than Q1 of 2023. Due to declines in both wholesale and product revenue, its overall sales declined by 7% in Q1 to $215.8 million.
However, its gross profit margin was 81%, more than 14 percentage points higher than a year earlier. As a result, its non-GAAP adjusted EBITDA was $50.4 million in the quarter, 24% higher than a year earlier. Its adjusted EBITDA margin was 23%, 577 basis points higher than a year earlier.
In terms of average monthly unique users, it had 34 million in the U.S. in the first quarter, up 6% YOY. Internationally, it had 8.6 million average monthly unique users, 19% higher than a year earlier.
Analysts much prefer CARG stock to KMX. Of the 14 covering its stock, 11 rate it a buy, with a $27.75 target price, 10% higher than where it currently trades.
It’s expected to earn $1.29 a share in 2024, $1.55 in 2025, and $1.83 in 2026.
Cars.com (CARS)
Cars.com (NYSE:CARS) is the smallest of the three used car stocks with a $1.31 billion market cap. Its asset-light business model has been around since 1998. Today, it has more than 26 million average monthly unique visitors to its marketplace. In 2023, it had 615 million visits and worked with nearly 20,000 dealers.
One example of how it’s able to help dealers is through its AccuTrade Instant Offer product.
“Additionally, through AccuTrade Instant Offer, consumers can obtain instant and transparent cash offers for their specific VINs via our dealer websites, as well as Cars.com. And if ready to sell or trade-in, consumers can find the best buyer for their vehicle,” states pg. 3 of its 2023 10-K.
The company generates more than 80% of its revenue from subscriptions, creating dependable recurring revenue. It makes approximately $2,500 per month from each of its 19,500 dealers.
Cars.com did a survey that showed that approximately 83% of its audience is in the market to buy a car, considerably higher than the general population. Further, the average car buyer takes two months to purchase a vehicle. Approximately 50% of the Cars.com audience plans to buy within 30 days.
In 2024, it expects revenue to grow 7% with an adjusted EBITDA margin of 29%. Based on 2023 revenue and adjusted EBITDA, revenue and adjusted EBITDA should be $737 million and $214 million, respectively.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
