BofA: Tight used car market favors AutoNation over CarMax

Investing.com - Bank of America (NYSE:BAC) (BofA) analysts have expressed their preference for AutoNation Inc (NYSE:AN) over CarMax Inc (NYSE:KMX) in a research note on Thursday.

The sourcing environment for used cars, particularly late-model used vehicles, remains challenging, a trend expected to persist through 2025 and beyond. This dynamic is likely to impede CarMax's same-store unit growth.

CarMax is facing increased competition from franchised dealers and Carvana Co (NYSE:CVNA), further exacerbating the issue.

As volume leverage fails to materialize, CarMax is also grappling with inflated costs. Unlike franchised dealers, CarMax has limited means to counter the challenging used car market.

The company's financing arm, CAF, is expected to witness weak earnings growth in the coming years due to slim securitization spreads, limited origination growth, and likely unsustainably low loan losses.

On the other hand, AutoNation is poised to benefit from an improving new vehicle sales cycle, driven by pent-up demand, and continue to generate strong cash flow. The firm is also likely to benefit from a push by Original Equipment Manufacturers (OEMs) for larger dealer groups, growth in trade-ins as new vehicle sales improve, an increase in customer wallet share, and strong cost management.

However, BofA analysts also highlight potential risks for AutoNation, including a decline in GPUs as the environment normalizes and the headwind of SG&A deleveraging as grosses come down. Despite these challenges, AutoNation is expected to mitigate these headwinds with efficient cost management.

For CarMax, BofA slightly lowered its estimates to account for weaker than expected CAF collateral spreads in the most recent ABS securitization.

The firm maintains its price target for CarMax at $50.