Carmax Returns to the Bargain Basement: Buy the Dip?

Key Points

• CarMax struggled in Q4 and revised its long-term target, sending shares down into the buying zone. 
• The market is range-bound after falling 50% from its highs and is unlikely to set new lows. 
• The share price may wallow now, but the long-term outlook includes a leveraged recovery due to increased store count and market share gains. 

CarMax, Inc. NYSE: KMX shares are down a solid 10% following a weak Q4 earrings report and a revision in the long-term guidance. The company didn't lower its sales targets. Still, it extended the time frame to reach it, citing uncertain conditions, the impact of higher prices and interest rates, and shaky consumer confidence. However, the stock price is also down more than 50% from its latest all-time high, trading near the 2020 bottom, suggesting the weakness was already priced into the market. 

Because CarMax faces significant headwinds, 2024 may be challenging for the business. Because the company is investing in new stores, growing market share, and a lower interest rate environment is ahead, the long-term outlook is robust. 

CarMax shares may wallow now but are at rock bottom and unlikely to fall significantly further, presenting an attractive time to build a position. The company is gaining leverage in the market and setting itself up for accelerated revenue and profit growth when economic conditions improve, so its share prices should increase over time. The catalyst for higher share prices may come later this year or early in 2025 when the FOMC makes the first interest rate cut in years. 

CarMax Will Pivot Back to Growth this Year

CarMax struggled in Q4, but consumer and wholesale markets are normalizing, and growth is expected to return this fiscal year. The company reported $5.63 billion in net revenue for a decline of 1.7%, with retail units up and wholesale units down. Retail units are up 1.3% YOY, with comp-store growth at 0.15. Retail revenue fell -0.7% on a decline in average selling price. Wholesale unit sales fell by 4%, with total revenue down 5.5%. 

Margin news is mixed but favorable to the long-term outlook. The company's margin contracted compared to last year, but the contraction's depth is amplified by one-offs in the previous year and weakness in wholesales. The GAAP earnings of 32 cents are down 12 cents from last year and missed consensus by 13 cents, but sufficient 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 didn't give specific guidance for F2025 but announced plans to open five new retail locations and two facilities to support additional growth. The timeline for long-term targets was pushed back, but it still includes two billion in annual unit sales and $33 billion in yearly revenue, nearly 25% growth from current levels. 

The Analysts See Upside for CarMax 

Analysts' activity in CarMax is supportive, but the trend may change now that the results are in. The 12 analysts tracked by Marketbeat have the stock rated a Hold and see it advancing 15% at the consensus now that prices are down. The consensus of $81 is noteworthy because it is near critical resistance at the top of a trading range. If the analysts begin trimming their targets, CarMax stock will remain rangebound until a shift in business quality is seen in the revenue and earnings. Also of note, Oppenheimer set the freshest target days before the release. It is a new high of $105, which is 55% above the current action. 

Institutions remain heavily invested in CarMax and command roughly 99% of the shares. Institutional activity reported by Marketbeat has been net bullish for the last 12 months. Institutional buying spiked in Q1 when the price action returned to lower levels and may do so again. 

The price action is sketchy and suggests a downtrend is still in effect. However, the market is also above critical support that has been in place for 18 months, so it is unlikely it will move outside of its trading range. In this scenario, investors might expect to see the price action retest the range's low end near $60 before rebounding to move sideways within the range.