Critical Comparison: CarMax Inc. (KMX) vs. AutoNation, Inc. (AN)

CarMax Inc. (NYSE:KMX) shares are up more than 9.57% this year and recently decreased -0.24% or -$0.17 to settle at $70.55. AutoNation, Inc. (NYSE:AN), on the other hand, is up 7.01% year to date as of 11/15/2017. It currently trades at $52.06 and has returned 1.19% during the past week.

CarMax Inc. (NYSE:KMX) and AutoNation, Inc. (NYSE:AN) are the two most active stocks in the Auto Dealerships industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.


The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect KMX to grow earnings at a 13.13% annual rate over the next 5 years. Comparatively, AN is expected to grow at a 5.68% annual rate. All else equal, KMX’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 3.53% for AutoNation, Inc. (AN). KMX’s ROI is 4.10% while AN has a ROI of 9.40%. The interpretation is that AN’s business generates a higher return on investment than KMX’s.

Cash Flow 

The value of a stock is simply the present value of its future free cash flows. KMX’s free cash flow (“FCF”) per share for the trailing twelve months was -1.01. Comparatively, AN’s free cash flow per share was +1.63. On a percent-of-sales basis, KMX’s free cash flow was -1.16% while AN converted 0.69% of its revenues into cash flow. This means that, for a given level of sales, AN is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. KMX has a current ratio of 2.30 compared to 0.70 for AN. This means that KMX can more easily cover its most immediate liabilities over the next twelve months. KMX’s debt-to-equity ratio is 3.94 versus a D/E of 2.01 for AN. KMX is therefore the more solvent of the two companies, and has lower financial risk.


KMX trades at a forward P/E of 17.36, a P/B of 4.03, and a P/S of 0.77, compared to a forward P/E of 12.90, a P/B of 2.30, and a P/S of 0.22 for AN. KMX is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. KMX is currently priced at a -8.14% to its one-year price target of 76.80. Comparatively, AN is 7.72% relative to its price target of 48.33. This suggests that KMX is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for KMX and 2.90 for AN, which implies that analysts are more bullish on the outlook for AN.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. KMX has a beta of 1.53 and AN’s beta is 1.21. AN’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. KMX has a short ratio of 6.96 compared to a short interest of 10.78 for AN. This implies that the market is currently less bearish on the outlook for KMX.


AutoNation, Inc. (NYSE:AN) beats CarMax Inc. (NYSE:KMX) on a total of 8 of the 14 factors compared between the two stocks. AN is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, AN is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, MTOR has better sentiment signals based on short interest.

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