Why the Market Got Revved Up About CarMax and Winnebago Last Week

In this segment from Motley Fool Money, host Chris Hill and analysts Jason Moser, David Kretzmann, and Ron Gross first dig into the latest quarterly numbers from auto dealership operator CarMax (KMX 0.71%), which turned in an earnings beat last week. But when you look under the hood, it's clear there are parts of this business that could use a bit of a tuneup. Used vehicle unit sales were only up 1.6% and comparable-store unit sales were down 2.3%.

So, what were investors thinking? The guys consider the near-term and longer-term stories for the company. Then, it's on to recreational vehicle manufacturer Winnebago (WGO 0.45%). Overall RV sales are at record highs, and sales of towables in particular are shooting upward, thanks to their popularity among two key demographics. Yet the market is still valuing Winnebago shares around 20% below where they were a year ago. Is there justification for that pessimism?

A full transcript follows the video.

This video was recorded on June 22, 2018.

Chris Hill: First quarter profits and revenue for CarMax came in higher than expected. Shares of CarMax up 12% on Friday. How good was this quarter, Ron?

Ron Gross: It actually wasn't that good. [laughs] It's mixed bag. They beat expectations, but the most important part of the business, not firing on all cylinders, if you will. Used vehicle unit sales, only up 1.6%. Comp store unit sales, down 2.3%. That's by far the most important part of this business. Now, the bottom line was helped by a lower tax rate, which, whose hasn't been? That made the results look pretty good, and it beat expectations.

There is a bright side. Conversions were up. So, when you walk into the store, they were able to convert people at a higher rate than previous. And, their auto finance unit is doing really well, up 5.7% in terms of income there. Their extended protection plans -- which are, let's face it, high-margin, those things fall right to the bottom line -- were up 9%. It helped to offset the part of the business that you really do, though, need to see improving quarter after quarter. So, don't see the stock jump and get too excited.

David Kretzmann: I think part of this was low expectations. The stock, even after today's pop, still trading for just about 18X forward earnings. I think the long-term growth story for CarMax is compelling. As far as Amazon-proof retailers go, I have to think CarMax has to be on that list.

There's an interesting story here. The national used car market is very fragmented, so CarMax has the opportunity to create a national brand around buying and selling used cars. From that perspective, I think, looking out over the next five years, there's still a lot of growth opportunity here.

Hill: I'm going to a CarMax this weekend. It sounds like, if the protection plans are high-margin, maybe I should just go ahead and avoid that?

Gross: [laughs] Yeah, maybe avoid that. I've had a very good experience there. I've never actually purchased or sold anything to them, but the experience was good. I'll be interested to see how you do.

Hill: Well, I have a 14-year-old minivan that might interest you. We can talk after the show.

Gross: That would be their wholesale auction sale unit, they'll sell that for you.

Hill: Nice. Shares of Winnebago rising 15% this week after a strong third quarter report. David, are you buying an RV?

Kretzmann: I'm thinking about it. A lot of millennials are. The strongest segment for Winnebago and most RV companies today by far is the towable unit. This quarter, towable unit sales up 33%. You're not only seeing more and more baby boomers hitting the road and getting into the outdoors -- which, apparently, Ron is definitely not going to be one of those. Not very positive about it.

Gross: Not such an outdoorsy guy.

Kretzmann: Not fond of the outdoors, Ron. I can't believe it. But, in this case, you not only have that tailwind of baby boomers buying RVs and hitting the road, but more and more millennials are going for these less expensive towable units and hitting the road.

Surprisingly enough, even after today's pop, the stock is still down about 20% so far this year. That's despite overall RV sales by far at all-time record highs. Last year, RV sales topped 500,000 units shipped. That number's expected to rise 8% this year. Still some pessimism in the market when it comes to RVs.

Hill: Historically, when we think about the retail industry, and how the holiday quarter for most retailers is the big quarter for them -- is this quarter historically the big quarter for RV manufacturers? It would seem like, hey, we're heading into the summer, that might be a time to get people into an RV.

Kretzmann: Yeah, this is definitely one of the bigger quarters. Part of the issue here is that we had a longer winter. April, which is typically a strong month, you saw a lot of sales go to future months, potentially. That's what these companies are hoping. It seems like these sales have been picking up. Camping World, which is probably the largest RV retailer in the U.S., they're seeing sales picking up outside of April. I think the future still looks bright.