On Thursday, Stephens initiated coverage on CarMax (NYSE:KMX) with an Equal Weight rating and a price target of $86.00. According to InvestingPro data, CarMax currently trades at high earnings and EBITDA multiples, with the stock showing strong momentum, returning over 28% in the past year.
The assessment comes after CarMax showed signs of a potential turnaround following a challenging period. The company had experienced a significant decline in profitability over a 10-quarter period from the fourth quarter of 2021 to the first quarter of 2024, with cumulative profitability dropping by approximately 50%.
Recent InvestingPro data shows the company maintains a current ratio of 2.25, indicating strong liquidity despite historical challenges. During this time, EBITDA growth was negative in nine out of ten quarters, averaging a decline of 19.2%. Similarly, same-store units sold also decreased in nine out of ten quarters, with an average drop of 9.2% per quarter.
However, the second quarter of 2024 results indicated a shift that might signal a positive change for CarMax. Year-over-year EBITDA for the quarter grew by 5.5%, and same-store unit sales increased by 4.3%. Additionally, selling, general and administrative (SGA) expenses as a percentage of gross profit showed a significant improvement, decreasing by 380 basis points from 84.1% to 80.3%.
The analyst from Stephens noted that while it is still early in CarMax's recovery process and the transition from profit decline to profit growth, the recent improvements provide a reason for cautious optimism. The price target of $86 is based on 12.5 times the firm's 2025 EBITDA estimate.
Prior to the second quarter of 2024, CarMax's financial performance had been on a downward trajectory, with EBITDA and same-store sales figures reflecting a challenging market environment. The recent quarter's results, however, may have marked a turning point, suggesting that CarMax could be on the path to recovery.
The analyst's comment underscores a watchful but hopeful stance on CarMax's future performance. InvestingPro analysis reveals 12 additional key insights about CarMax, including detailed financial health scores and comprehensive valuation metrics, available in the Pro Research Report.
In other recent news, CarMax, a major player in the automotive retail industry, has been the subject of numerous updates from analyst firms. Evercore ISI has raised its price target for CarMax from $76 to $79, maintaining an In Line rating. The firm attributes this adjustment to CarMax's customer experience enhancement efforts and anticipates these initiatives will facilitate future share gains and profitable revenue streams.
Baird has reaffirmed its Outperform rating on CarMax, maintaining a steady price target of $84. The firm acknowledges CarMax's advancements in sourcing and credit initiatives as key factors contributing to the potential for increased market share and profitability. Truist Securities, however, has lowered its price target for CarMax to $72 from $75, citing concerns over a challenging credit environment and potential impacts on sales.
Needham has raised its price target for CarMax to $90 from $87, following the company's strong second-quarter performance. The firm maintains a Buy rating on the stock. Mizuho (NYSE:MFG) has maintained its Neutral stance on CarMax with a consistent price target of $72, expressing concerns about increasing credit pressures faced by the company.
CarMax reported a 13% increase in earnings for the August quarter at $0.85 per share, despite a slight decrease of 0.9% in net sales, totaling $7.01 billion. The company also reported a 5.1% increase in retail unit sales. CarMax is testing new credit scoring models and planning to centralize logistics operations as part of its recent strategic developments.
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