Why CarMax Stock Crashed Today

Key Points

• Wall Street analysts forecast strong earnings growth for CarMax last quarter.

• Instead, profits fell 25%.

• CarMax stock looks cheap -- but profits must resume growing for it to be a bargain.

• 10 stocks we like better than CarMax ›

CarMax (NYSE: KMX) turned into a one-car pileup Thursday, falling 19.7% through 2:15 p.m. ET after reporting worse-than-expected earnings for its fiscal second quarter, ended Aug. 31.

Heading into the report, analysts forecast a strong quarter for the used car dealer, with earnings of $1.03 per share on $7 billion in sales. Instead, CarMax's profit was only $0.64 per share, and sales were only $6.6 billion.

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CarMax Q2 earnings

Year over year, sales sank 6%, worse than the company's 5.4% decline in retail sales, indicative of both weaker customer demand and lower prices. Wholesale sales, however, declined only 2.2% -- so part of the relative weakness in revenue may stem from CarMax making more lower-priced wholesale sales and fewer lucrative retail sales.

Overall car demand, though, also appears to be weakening, with CarMax buying 2.4% fewer cars for resale -- indicative of where management sees market demand heading.

Profits plunged 25% year over year, instead of growing as analysts had hoped they would.

Is CarMax stock a buy?

CEO Bill Nash admitted Q2 was "challenging," but insisted that despite the steep decline in profits, he's still "confident in our long-term strategy and the strength of the earnings model." Just to be safe, though, he's cutting selling, general, and administrative spending by $150 million over the next 18 months.

Personally, I'm not sure he's right to be optimistic.

At $6.9 billion in market capitalization and with $521 million in trailing profit, CarMax doesn't look too expensive at just 13.2 times earnings. With analysts forecasting 16% long-term earnings growth, that should make CarMax stock a good value. Problem is, analysts just got caught flat-footed predicting earnings growth -- and were surprised by the 25% earnings decline.

If this keeps up, even as cheap as it looks, CarMax stock could be a sell.

Should you invest $1,000 in CarMax right now?

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CarMax. The Motley Fool has a disclosure policy.