CarMax shares target cut on near-term recovery doubts

On Friday, RBC Capital adjusted its outlook on CarMax (NYSE:KMX), reducing the price target on the company's shares to $73.00 from the previous $83.00, while retaining an Outperform rating.

The move came after an analysis of CarMax's fourth-quarter results, which showed a mixed performance with retail comp units nearing flat levels after a 4% decline in the third quarter. However, the first quarter of the current fiscal year has shown a downward trend in the mid-single digits, and management has delayed their long-term unit target, casting uncertainty on the immediate prospects for unit recovery.

The firm's revised financial forecasts for CarMax now include a decrease in retail comp unit estimates for fiscal years 2025 and 2026 to -0.6% and +2.5%, respectively, from previously expected figures of +3.9% and +2.0%.

Additionally, net sales growth projections have been modified to -2.7% for fiscal year 2025 and +3.7% for fiscal year 2026, a change from the earlier estimates of +0.5% and +3.7%.

The updated earnings per share (EPS) predictions from RBC Capital now stand at $3.02 for fiscal year 2025 and $3.97 for fiscal year 2026, a downward revision from the former estimates of $3.29 and $4.54. The new price target of $73 is based on approximately 18.5 times the firm's revised fiscal year 2026 EPS estimate of $3.97.

Despite the lowered price target and estimates, RBC Capital maintains an Outperform rating on CarMax shares. The firm expressed the belief that CarMax's earnings per share have reached a low point. However, they also noted that it might take time for the company to realize significant earnings growth.

Recent data from InvestingPro provides a deeper look into CarMax's (NYSE:KMX) financial health and market performance. With a market capitalization of $11.34 billion and a P/E ratio of 26.26, CarMax is navigating challenging market conditions, as reflected in a revenue decline of -14.53% over the last twelve months as of Q3 2024. Despite this, the company has shown a strong return over the last three months, with a price total return of 19.08%, signaling potential investor confidence in its recovery.

InvestingPro Tips highlight CarMax as a prominent player in the Specialty Retail industry that operates with a significant debt burden and suffers from weak gross profit margins, with only 11.62% as of Q3 2024. The company is also trading at high EBIT and EBITDA valuation multiples, which could be a concern for value-focused investors. On the brighter side, CarMax has liquid assets that exceed short-term obligations, providing some financial flexibility. With analysts predicting profitability this year and a profitable track record over the last twelve months, CarMax may be at a turning point despite the anticipated sales decline in the current year.

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For readers looking to delve deeper into CarMax's financials and strategic positioning, there are 12 additional InvestingPro Tips available at https://www.investing.com/pro/KMX. To enhance your investment analysis, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

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