A Side-by-side Analysis of CarMax, Inc. (KMX) and Varonis Systems, Inc. (VRNS)

CarMax, Inc. (NYSE:KMX) shares are up more than 37.94% this year and recently increased 1.42% or $1.21 to settle at $86.53. Varonis Systems, Inc. (NASDAQ:VRNS), on the other hand, is up 15.22% year to date as of 09/12/2019. It currently trades at $60.95 and has returned -13.00% during the past week.

CarMax, Inc. (NYSE:KMX) and Varonis Systems, Inc. (NASDAQ:VRNS) are the two most active stocks in the Auto Dealerships industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect KMX to grow earnings at a 12.43% annual rate over the next 5 years. Comparatively, VRNS is expected to grow at a 48.80% annual rate. All else equal, VRNS’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. CarMax, Inc. (KMX) has an EBITDA margin of 7.51%. This suggests that KMX underlying business is more profitable KMX’s ROI is 4.80% while VRNS has a ROI of -23.60%. The interpretation is that KMX’s business generates a higher return on investment than VRNS’s.

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. KMX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.21. Comparatively, VRNS’s free cash flow per share was -0.52. On a percent-of-sales basis, KMX’s free cash flow was -0.19% while VRNS converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, VRNS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. KMX has a current ratio of 2.20 compared to 1.50 for VRNS. This means that KMX can more easily cover its most immediate liabilities over the next twelve months. KMX’s debt-to-equity ratio is 4.19 versus a D/E of 0.00 for VRNS. KMX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

KMX trades at a forward P/E of 15.24, a P/B of 4.17, and a P/S of 0.77, compared to a P/B of 18.41, and a P/S of 6.99 for VRNS. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. KMX is currently priced at a -11.48% to its one-year price target of 97.75. Comparatively, VRNS is -24.48% relative to its price target of 80.71. This suggests that VRNS is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. KMX has a beta of 1.17 and VRNS’s beta is 0.87. VRNS’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. KMX has a short ratio of 12.54 compared to a short interest of 6.40 for VRNS. This implies that the market is currently less bearish on the outlook for VRNS.

Summary

Varonis Systems, Inc. (NASDAQ:VRNS) beats CarMax, Inc. (NYSE:KMX) on a total of 7 of the 14 factors compared between the two stocks. VRNS is more profitable, has a higher cash conversion rate and has lower financial risk. VRNS is more undervalued relative to its price target. Finally, VRNS has better sentiment signals based on short interest.