CarMax shares upgraded on improved auto dealer outlook

On Tuesday, CarMax (NYSE:KMX) received an upgrade from CFRA, with the firm's analyst changing the stock's rating from Hold to Buy and lifting the price target to $100 from the previous $70. The revised target is based on a forward price-to-earnings (P/E) ratio of 24.4x for the fiscal year ending in February 2026, which represents a premium over CarMax's five-year average forward P/E of 22.0x.

The analyst maintained the fiscal year 2025 earnings per share (EPS) estimate at $3.05 but increased the fiscal year 2026 EPS forecast to $4.10 from $3.75.

The upgrade reflects a more optimistic view of the auto dealership environment in the upcoming quarters. The analyst cites improving affordability and potential easing of interest rates as positive factors for CarMax.

The auto dealer market has faced challenges in recent quarters due to higher interest rates and growing inventories, which have impacted sales and profitability. However, indicators suggest a shift in the market. In July, U.S. used vehicle sales saw a year-over-year increase of 15% and a month-over-month rise of 27%.

Additionally, used vehicle inventories decreased to a 41-day supply at the start of August, down from the previous year and the preceding month.

The report also highlights the Cox Automotive/Moody's Vehicle Affordability Index, which recently reached its most favorable level in three years, suggesting that vehicles are becoming more affordable for consumers. The analyst believes that lower interest rates will likely provide further support to the industry, benefiting companies like CarMax.

In other recent news, CarMax has reported mixed results for its Q1 Fiscal Year 2025. Total sales for the company reached $7.1 billion, reflecting a 7% decrease from the previous year. However, CarMax Auto Finance income saw a 7% year-over-year increase, and used-saleable inventory units grew by 5%.

The company also announced strategic initiatives aimed at fostering future growth, such as broadening vehicle sourcing capabilities, launching in new markets, and implementing cost-saving measures.

In addition, CarMax recently conducted its 2024 Annual Meeting of Shareholders, during which ten directors were elected to the Board, and KPMG LLP was ratified as the company's independent registered public accounting firm for the fiscal year 2025.

Several analyst firms have also updated their outlook on CarMax. Needham maintained a Buy rating but lowered the price target to $87. Truist Securities increased its price target to $70, while RBC Capital Markets raised its price target to $75, maintaining an Outperform rating. These adjustments reflect various expectations for CarMax's earnings per share and market performance.

InvestingPro Insights

Recent updates from InvestingPro provide a nuanced perspective on CarMax's (NYSE:KMX) financial health and market position. With a current market capitalization of $13.16 billion, CarMax trades at a high earnings multiple with a P/E ratio of 33.17, exceeding the industry average. This indicates investor confidence in the company's future earnings potential, despite analysts anticipating a sales decline in the current year. The latest data from the last twelve months as of Q1 2023 shows a revenue of approximately $27.69 billion, with a decline of 6.31%, which aligns with CFRA's cautious outlook on the industry's challenges.

InvestingPro Tips highlight CarMax's status as a prominent player in the Specialty Retail industry, which may justify its valuation premiums. Moreover, the company's stock price has experienced considerable volatility, yet it has demonstrated a strong return over the last three months with a 21.67% increase in price total return. This is particularly relevant considering the analyst's optimistic view of the auto dealership environment in the upcoming quarters. Additionally, CarMax's liquid assets exceed its short-term obligations, which suggests a stable financial position to weather potential market fluctuations.

For readers seeking a deeper dive into CarMax's financials and market performance, InvestingPro offers additional insights and tips. As of now, there are 12 more InvestingPro Tips available for CarMax, which can be accessed for more detailed analysis and investment considerations.

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