Key points
- CarMax struggled in the fourth quarter and revised its long-term target, sending the stock into buy territory.
- The market is range-bound after falling 50% from the highs and is unlikely to set new lows.
- The share price may collapse now, but the long-term outlook includes a leveraged recovery due to increased store counts and market share gains.
- 5 stocks we like better than CarMax
CarMax, Inc. New York Stock Exchange: KMX shares fell a solid 10% following a weak fourth-quarter earrings report and a review of long-term guidance. The company has not lowered its sales goals. However, it extended the timeframe for getting there, citing uncertain conditions, the impact of higher prices and interest rates and unstable consumer confidence. However, the share price has also fallen more than 50% from its last all-time high, trading near its 2020 low, suggesting weakness was already priced into the market.
As CarMax faces significant headwinds, 2024 could be challenging for the company. As the company is investing in new stores, growing market share, and a lower interest rate environment is expected, the long-term outlook is strong.
CarMax shares may fall now, but they are at lows and unlikely to fall significantly further, presenting an interesting time to build a position. The company is gaining leverage in the market and is preparing for accelerated revenue and profit growth when economic conditions improve, so its stock prices are expected to rise over time. The catalyst for rising stock prices could come later this year or in early 2025, when the FOMC makes its first interest rate cut in years.
CarMax will return to growth this year
CarMax struggled in the fourth quarter, but the consumer and wholesale markets are normalizing and growth is expected to return this fiscal year. The company reported net sales of $5.63 billion, down 1.7%, with retail units increasing and wholesale units decreasing. Retail units increased 1.3% year over year, with comp-store growth of 0.15. Retail revenues decreased -0.7% due to the decline in average selling price. Wholesale unit sales fell 4%, with total revenue down 5.5%.
Margin news is mixed but favorable for the long-term outlook. The company’s margin contracted compared to last year, but the depth of the contraction is amplified by one-off episodes in the previous year and weak wholesale sales. GAAP earnings of 32 cents are down 12 cents from last year and missed consensus by 13 cents, but are enough to maintain a healthy business outlook. Balance sheet highlights include an increase in cash and total assets, a reduction in debt, and an 8% increase in equity.
CarMax did not provide specific guidance for F2025 but announced plans to open five new stores and two facilities to support further growth. The timeline for long-term goals has been pushed back, but still includes two billion annual unit sales and $33 billion in annual revenue, growth of nearly 25% from current levels.
Analysts see a silver lining for CarMax
Analyst activity at CarMax is supportive, but the trend may change now that results are available. The 12 analysts tracked by Marketbeat have rated the stock a Hold and see it advancing 15% versus consensus now that prices are falling. The $81 consensus is noteworthy because it is near critical resistance at the top of a trading range. If analysts start reducing their targets, CarMax stock will remain range-bound until a change in the quality of the business is seen in revenue and earnings. Also note that Oppenheimer set the cooler target days before release. This is a new high of $105, which is 55% above the current stock.
Institutions remain heavily invested in CarMax and control about 99% of the shares. Institutional activity reported by Marketbeat has been sharply bullish over the past 12 months. Institutional buying surged in the first quarter as price action returned to lower levels and may do so again.
The price action is choppy and suggests that a downtrend is still in place. However, the market is also above critical support that has been in place for 18 months, so it is unlikely to move out of its trading range. In this scenario, investors could expect to see the price action retest the low end of the range near $60 before rebounding to move sideways within the range.
Before you consider CarMax, you’ll want to hear this.
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