JPMorgan maintains underweight CarMax stock with $65 target

On Friday, JPMorgan reiterated its underweight rating on CarMax (NYSE:KMX) shares, maintaining a price target of $65.00. The stock has already taken a significant hit, dropping over 12% in the past week and currently trading near its 52-week low of $63.23. Stifel analysts cited a combination of factors influencing their decision, including a reduction in the forecasted earnings per share (EPS) for fiscal years 2026 and 2027 to $3.75 and $4.05 respectively. According to InvestingPro data, CarMax currently generates $2.93 in diluted EPS on revenue of $27.8 billion. This adjustment takes into account an anticipated decline in demand for used cars in the second half of fiscal year 2027, which is expected to be affected by auto tariffs impacting auto affordability and the supply of used cars.

CarMax's performance has lagged behind its peers over various time frames, with the company's EPS decreasing by 40% since fiscal year 2020, while franchise dealers experienced a 200% increase. InvestingPro analysis reveals concerning profitability metrics, with gross profit margins at just 12.18% and a return on invested capital of 2%. The analysts pointed out that despite various strategic changes by CarMax, such as stand-alone reconstructions, auctions, and an expansion in their CarMax Auto Finance (CAF) program, there has not been a significant improvement in profitability. EBITDA per unit remains approximately 22% below fiscal year 2020 levels, with non-CAF EBITDA per unit about 50% lower. Additionally, CarMax has not seen market share gains, even though online sales now constitute around 15% of their sales mix, up from 0% in fiscal year 2020.

The report also notes that while increasing Tier 2 and Tier 3 loan originations may be beneficial in the long term, they are likely to lead to higher provisioning in the near term, which could negatively impact earnings revisions. Furthermore, the potential permanence of auto tariffs could delay the anticipated recovery in supply in 2026 and create additional demand headwinds due to affordability issues.

CarMax's stock is currently trading at approximately 18 times its fiscal year 2 projected earnings, which is still slightly above historical averages. With a current P/E ratio of 27.29x and a market capitalization of $10.19 billion, InvestingPro analysis suggests the stock is currently overvalued relative to its Fair Value. In contrast, franchise dealer multiples are trading at a roughly 10% discount to long-term averages. The analysts also highlighted that CarMax's competitor, Carvana (NYSE:CVNA), continues to gain significant market share and sustain superior economics, which could further limit CarMax's stock multiple, as observed before the pandemic. Investors can access detailed valuation metrics and 10 additional ProTips about CarMax through InvestingPro's comprehensive research platform.

In other recent news, CarMax reported its fourth-quarter fiscal year 2025 earnings, revealing a mixed financial performance. The company posted earnings per share (EPS) of $0.58, which fell short of the forecasted $0.65. However, CarMax achieved a 7% year-over-year increase in total sales, reaching $6 billion. CFRA analyst Garrett Nelson upgraded CarMax's stock rating to Strong Buy, despite adjusting the price target downwards from $115.00 to $95.00. Nelson cited the company's recent earnings report and anticipated a year-over-year EPS growth of 21% in fiscal year 26, followed by a 24% increase in fiscal year 27. Conversely, Truist Securities adjusted its outlook, reducing the price target for CarMax from $88.00 to $72.00 while maintaining a Hold rating, following a solid fourth-quarter performance but with used unit comp sales slightly missing expectations. CarMax's decision to remove the timeframe from its long-term goals, including surpassing two million unit sales, was attributed to macroeconomic uncertainties. The company's strategy to enhance its digital capabilities paid off, with digital sales growing by 25% for the fiscal year.

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