CarMax stock crashes after 'challenging' second-quarter earnings

Key Concepts:

• CarMax earnings miss
• Used vehicle market performance
• Loan loss provisions
• Auto loan delinquency rates
• Auto supplier stock performance
• Impact of tariffs on auto industry
• Consumer strength and economic outlook

CarMax Earnings and Performance:

• CarMax shares plummeted nearly 20% after reporting earnings and revenue below analyst expectations, reaching levels not seen since March 2020.
• The report was described as universally negative, with almost every key metric underperforming.
• The CEO stated that the quarter's performance deteriorated month by month.
• Vehicle sales (both retail and wholesale) decreased.

Loan Loss Provisions and Delinquency Rates:

• Loan loss provisions increased by 26% compared to the same quarter last year, indicating a deterioration in loan quality.
• Delinquencies and defaults are rising, particularly for loans originated in 2022 and 2023.
• The auto loan delinquency rate is currently at 2.54%. While not as high as the rates during the 2008-2009 financial crisis, it has increased significantly in recent years.
• This increase raises concerns about the strength of the consumer and the potential for a return to higher delinquency rates.

Auto Supplier Stock Performance:

• Despite the negative outlook for automakers based on CarMax's results, auto supplier stocks have performed well, especially since early April.
• Auto supplier stocks were initially "hammered" following the announcement of tariffs.
• Companies like Visteon, Magna, BorgWarner, and Lear have seen strong performance.
• The outperformance is attributed to the suppliers' ability to pass tariff costs onto automakers.
• Automakers have been forced to accept higher prices from suppliers to secure necessary parts and components, leading to lower margins for the automakers.

Impact of Tariffs:

• Tariffs initially negatively impacted auto supplier stocks.
• However, suppliers have since been able to pass these costs onto automakers.

Conclusion:

The CarMax earnings report paints a concerning picture of the used vehicle market and consumer credit quality, with rising loan loss provisions and delinquency rates. However, auto suppliers have managed to thrive by passing tariff costs onto automakers, resulting in strong stock performance for companies like Visteon, Magna, BorgWarner, and Lear. This highlights a divergence in performance within the auto industry, with suppliers benefiting from their pricing power despite challenges faced by retailers like CarMax.