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On Monday, Evercore ISI analyst Michael Montani adjusted the price target for CarMax (NYSE:KMX) shares to $90 from the previous $100, while sustaining an Outperform rating on the stock. Montani noted the company’s operational performance is benefiting from a growing price spread between new and used vehicles and efficiency improvements. These factors contributed to a 5% comp, 14% growth in gross profit, and a significant 770 basis point enhancement in the SG&A/Gross profit ratio.
Despite these operational gains, CarMax shares have not reacted as positively, with concerns looming over the company’s increased credit provision expected for fiscal year 2026. Other worries include the impact of potential tariffs and the possibility of a recession, as well as a shortfall in fourth-quarter comp and earnings per share (EPS). InvestingPro analysis reveals the company’s financial health score is "FAIR," with a current ratio of 2.31x indicating sufficient liquidity to meet short-term obligations. The stock’s beta of 1.59 suggests higher volatility compared to the broader market, which investors should consider in their risk assessment. Montani believes the decline in stock price is not due to skepticism about long-term financial goals, as the market had already discounted the likelihood of CarMax achieving sales of more than 2 million units.
CarMax has set forth new targets, aiming for several years of comp growth and market share gains to support double-digit EPS growth. Montani suggests that if comps rise to mid-single digits, there could be a high teens EPS compound annual growth rate (CAGR). The analyst’s confidence in CarMax’s earnings power is reinforced by the completion of significant omnichannel investments.
Looking ahead to the first quarter of fiscal year 2025, CarMax’s retail used unit comps and margins are expected to improve, driven by the widening gap in pricing between new and used vehicles, which is anticipated to bolster demand. The company’s strategy to enhance its multichannel approach and expand its assortment of 6-10 year old vehicles is also expected to contribute to its market share growth amidst a rising price environment. While tariffs remain an uncertain factor, Montani predicts an increase in new vehicle prices may lead consumers to opt for used cars.
Montani has made a 4% reduction in EPS projections for fiscal years 2025 and 2026, factoring in the higher credit provisioning, but anticipates some mitigation from retail gross profit per unit (GPU). The revised base case price target of $90 is based on an 18.5 times multiple of the projected EPS for fiscal year 2026. InvestingPro data shows CarMax trading at a P/E ratio of 21.3x, which appears high relative to its near-term earnings growth. However, the stock is currently trading below its InvestingPro Fair Value, suggesting potential upside opportunity. Subscribers to InvestingPro can access over 30 additional financial metrics and insights about CarMax, including exclusive ProTips and comprehensive valuation analysis.
In other recent news, CarMax has reported its fourth-quarter earnings, with an earnings per share (EPS) of $0.58, which was up 81% year-over-year but fell short of the analyst consensus estimate of $0.66. Gross profit per unit increased by 3.1% to $2,322, surpassing expectations, while total retail units sold rose by 6.2%. CarMax Auto Finance profits also exceeded expectations, reaching $159 million, an 8% increase year-over-year. RBC Capital Markets adjusted its price target for CarMax to $80 from $103, maintaining an Outperform rating, while Needham lowered its price target to $92 from $101, keeping a Buy rating. Evercore ISI maintained its $100 target despite the EPS miss, highlighting the potential impact of tariffs on the used vehicle market. JPMorgan reiterated its underweight rating with a $65 price target, citing anticipated challenges in the used car market due to tariffs and supply issues. Truist Securities reduced its price target to $72 from $88, noting that while near-term trends are positive, CarMax faces potential headwinds from tariffs and market share challenges. These recent developments reflect a mix of positive performance and cautious outlooks from various analyst firms.
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