3 Auto Stocks With More Potential for Gains Than CarMax (KMX)

Rising global demand, technological innovations, and an increased emphasis on safety and sustainability are fueling the auto rental industry. Therefore, join me as I discuss why quality auto stocks Group 1 Automotive, Inc. (GPI), Rush Enterprises, Inc. (RUSHA), and Cars.com Inc. (CARS) are better poised for gains than CarMax, Inc.’s (KMX).

Used car company KMX reported a net sales and operating revenue of $7.08 billion in the fiscal second quarter that ended August 31, 2023, a steep 13.1% decline from the previous-year quarter. Its gross profit declined 5.5% year-over-year to $696.77 million and net earnings fell 5.8% from the year-ago quarter to $118.64 million.

Moreover, analysts expect KMX’s revenue to fall 1.6% from the previous-year quarter to $6.41 billion in the current quarter ending November 2023. Shares of KMX have declined 19.7% over the past month, closing the last trading session at $66.10.

To add to that, KMX’s 1.75% trailing-12-month ROTA is 71.2% lower than the 6.08% industry average. Its trailing-12-month net income margin of 1.59% is 63.9% lower than the 4.40% industry average. Furthermore, the stock’s 1.50% trailing-12-month Capex/Sales is 53.9% lower than the industry average of 3.22%.

Regardless, urbanization has created congestion and limited city parking, discouraging car ownership and favoring rental services. Additionally, the car rental industry is evolving with new services like car-sharing and peer-to-peer car rental platforms, further bolstering the demand for rental vehicles.

According to a report by Fact.MR, worldwide demand for car rental services is expected to grow at a CAGR of 9.6% and reach $200 billion by 2033.

In addition, the low rate of car ownership among millennials, who increasingly opt to rent vehicles due to the high costs associated with car ownership, is boosting the passenger car rental market. Technological advancements are also reshaping the market, with major companies developing innovative solutions to enhance their offerings.

The global passenger car rental market is expected to grow to $173.19 billion in 2023 at a CAGR of 5.4%.

Furthermore, driven by increasing demand for both personal and commercial vehicles, the emergence of innovative technologies such as electric and autonomous vehicles, and heightened consumer awareness regarding safety and environmental concerns, the automotive industry is poised for continued expansion in the upcoming years.

The global automotive market is expected to grow to $28.70 billion by 2030 at a CAGR of 4.5%.

With these favorable trends in mind, let’s delve into the fundamentals of the three best Auto Dealers & Rentals stocks, beginning with the third choice.

Stock #3: Group 1 Automotive, Inc. (GPI)

GPI operates in the automotive retail sector in the United States and the United Kingdom. The company sells new and used vehicles, parts, and insurance contracts while providing financing and automotive maintenance services.

GPI’s trailing-12-month ROTA of 9.18% is 138.4% higher than the industry average of 3.85%. Its trailing-12-month asset turnover ratio of 2.50x is 150.8% higher than the industry average of 1x.

On September 15, 2023, GPI paid a quarterly dividend of $0.45. With a four-year average dividend yield of 0.84%, GPI pays an annual dividend of $1.80, which translates to a dividend yield of 0.73% on the current price level. The company has raised its dividend payouts at a CAGR of 43.4% over the past three years.

During the fiscal second quarter that ended June 30, 2023, GPI’s total revenues increased 10% year-over-year to $4.56 billion. Its gross profit increased marginally year-over-year to $775.50 million. Its income from operations stood at $270.80 million and earnings per share came in at $12.04, representing an increment of 1.2% year-over-year.

GPI’s revenue is expected to increase 6.2% year-over-year to $4.42 billion in the current quarter (ended September 2023). Its EPS is expected to be $11.27 in the same quarter. Additionally, it has exceeded its EPS and revenue estimates in each of the trailing four quarters.

Shares of GPI have gained 64.2% over the past year, closing the last trading session at $246.43.

GPI’s POWR Ratings reflects this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

GPI also has an A grade for Value. It is ranked #6 in the 23-stock Auto Dealers & Rentals industry.

In addition to the POWR Ratings highlighted above, one can access GPI’s ratings for Momentum, Growth, Quality, Stability, and Sentiment here.

Stock #2: Rush Enterprises, Inc. (RUSHA)

RUSHA is an integrated retailer of commercial vehicles and related services. It runs 125 franchised Rush Truck Centers in 23 states and 15 international dealerships in Ontario. The company also covers aftermarket parts, service, body shops, financing, insurance, leasing, rental, chrome accessories, and tires.

RUSHA’s trailing-12-month CAPEX/Sales of 4.20% is 42.8% higher than the 2.94% industry average. Its trailing-12-month asset turnover ratio of 1.97x is 142.2% higher than the industry average of 0.81x.

On September 22, RUSHA paid a quarterly cash dividend of $0.17 per share of Class A and Class B common stock. The company pays an annual dividend of $0.68, that translates to a yield of 1.68% on the current market price. It has raised its dividend payouts at a CAGR of 35.8% over the past three years and 61.7% over the past five years.

During the second quarter that ended June 30, 2023, RUSHA’s total revenue increased 11.8% year-over-year to $2 billion. Its gross profit grew 10.6% from the year-ago quarter to $413.85 million. Moreover, the company’s operating income rose 5.8% from the prior year’s quarter to $142.86 million.

Analysts expect RUSHA’s revenue to increase 5.2% year-over-year to $1.96 billion in the fiscal third quarter that ended September 2023. Moreover, the company topped the consensus revenues and EPS estimates in all four trailing quarters.

The stock has soared 29.3% over the past year, closing the last trading session at $39.86.

RUSHA’s positive prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.

RUSHA has an A grade for Sentiment and a B for Value and Stability. It is ranked #4 in the same industry.

To access RUSHA’s additional ratings for Growth, Momentum, and Quality, click here.

Stock #1: Cars.com Inc. (CARS)

CARS operates as a digital marketplace and provides solutions for the automotive industry. Its platform connects car shoppers with sellers.

CARS’s trailing-12-month net income margin of 16.90% is 369.1% higher than the industry average of 3.60%. Its trailing-12-month asset turnover ratio of 0.63x is 29% higher than the industry average of 0.48x.

In the fiscal second quarter ended June 30, 2023, CARS’s total revenue increased 3.3% year-over-year to $168.18 million. The company’s net income and EPS increased significantly year-over-year to $94.13 million and $1.37.

Street expects CARS’s revenue to increase 5% year-over-year to $172.83 million for the fiscal third quarter that ended September 2023. Its EPS is expected to be $0.48 for the same quarter. Also, the company topped the consensus EPS estimates in each of the four trailing quarters.

The stock has gained 39.6% over the past year to close the last trading session at $17.05.

CARS’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.

The stock has a B grade for Value. It is ranked #3 in the same industry.

Click here to access the additional CARS ratings (Momentum, Growth, Stability, Sentiment, and Quality).

What To Do Next?

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GPI shares were trading at $251.35 per share on Friday afternoon, up $4.92 (+2.00%). Year-to-date, GPI has gained 40.14%, versus a 13.31% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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