What if there is no turn in autos? On Friday we got a report from CarMax (KMX) that was solid and the stock shot up six bucks and change, or nearly 10%. It was a remarkable surge, and I figured it had to do with strength in the used-car market, which could imply good new car numbers.
Nope, not at all; if anything, the commentary on the call bolsters the case of the secular trend against cars that Lyft (LYFT) talked about all last week leading up to its IPO.
Why the strength of CarMax's stock? It had more to do with a rollout of an omnichannel strategy that resembles that of Carvana (CVNA) than it does robust sales. I totally get the increase in valuation, because CarMax has 10 times the sales of Carvana. CarMax also makes $3.52 per share vs. a $2.18 loss per share for the popular Carvana. So, it must rankle CarMax management that it was worth slightly more than $10 billion while Carvana comes in at $7.8 billion. At least now with the announcement of a Carvana-like product rolled out in an Atlanta test market, there's something that resembles Carvana's growth without a sacrifice of profit.
This brings me back to the judgment about the overall auto market. There was actually nothing good in the calls about new car sales. Of course, CarMax is a used-vehicle shop, and it did comp at 2.8%, which is pretty good for the chain, especially when it comped at negative 8% in the prior year's quarter.
Even better, William Nash, CarMax's chief executive, said "while we were pleased to report positive comps this quarter, we believe they were affected by delays in the February tax refunds relative to last year, continued higher acquisition costs and a robust competitive environment."
As far as new car sales, Nash ventured to say that prices are "under a little bit of pressure." In fact, any read-through of the strength at CarMax vs. the new car business is nothing but negative, jiving with a CNBC report last week that first quarter auto sales are expected to drop 2.5%, even as the price of a new vehicle is expected to hit $33,319.
Now it isn't all bad. Ford (F) just announced it's increasing production of the Ford Expedition and the Lincoln Navigator -- very lucrative autos -- by 20% to meet customer demand. Ford is gaining share, and average transaction price is climbing.
Still, the Detroit News reported that unsold new cards rose 2.1%, setting an all-time high for February. That's a 21-month high. The bulge confirms CarMax's impression of the market and the overall pricing environment.
With this bulge, I am beginning to wonder whether the impact of Lyft and Uber on the entire car market is playing out much faster than we think it is. Perhaps the entire car market is rolling over in a secular and not a cyclical way. Car sales used to correlate with employment, and these are the hottest employment numbers in 40 years. Sure, cars last longer than they used to, but that trend's been happening for years and it didn't put a dent in new car sales. When you go through the Lyft prospectus, it is filled with bruising terms about how they want autos to decline and how they are declining in many areas.
I think this is a real trend and while it bodes well for Uber and Lyft, I think it is going to cause real pressure on car prices. I also think Ford's increase in production is an anomaly, because while the cars that are selling well are higher priced vehicles, the numbers of cars made may be simply too high and the entire economy may be permanently downshifted by this development. It's a sobering trend unless you own stock in Lyft or the soon to come Uber.