On Thursday, CFRA analyst Garrett Nelson reiterated a Buy rating on CarMax (NYSE:KMX) with a steady price target of $100. The firm's 12-month target is based on a projected P/E of 24.4x for fiscal year 2026 ending in February, which is a premium compared to CarMax's five-year mean forward P/E of 22.2x. Although the FY 2025 earnings per share (EPS) estimate was slightly reduced by $0.05 to $3.00, the FY 2026 estimate remains unchanged at $4.10.
CarMax reported earnings for the August quarter at $0.85 per share, a 13% increase from $0.75 in the same quarter the previous year. However, this was a penny below the consensus estimate. The minor shortfall in earnings was attributed to a tax rate of 25.3%, which was higher than the anticipated 24.6%.
Despite the dip in earnings, CarMax's net sales were slightly down by 0.9% to $7.01 billion, which still beat the consensus by $190 million. Additionally, the company saw an expansion in gross margin by 100 basis points to 10.8%, slightly above the consensus by 10 basis points.
The analyst highlighted that improving affordability and lower interest rates are significant advantages for auto dealerships as they look towards 2025 and beyond. CarMax, in particular, is expected to benefit from these factors due to its focus on used vehicles.
The report notes that used vehicle prices have decreased by 21% from their 2022 peak, compared to a 4% decline for new vehicles. This price drop in used vehicles is poised to position CarMax favorably in terms of sales volume.
Furthermore, the analyst anticipates that CarMax will experience favorable year-over-year earnings comparisons, which should serve as a tailwind for the company. The report suggests that the combination of these factors places CarMax in a strong position to capitalize on market conditions in the coming years.
In other recent news, CarMax, the nation's largest used car retailer, reported mixed results for the second quarter of 2025. Despite a challenging market, the company saw a 1% decrease in total sales, amounting to $7 billion, but experienced a 5.1% increase in retail unit sales. The average selling price for used vehicles fell by 5%, while the gross profit per used unit remained stable at $2,269. CarMax Auto Finance (CAF) reported a 14% decline in income, primarily attributed to an increase in loan loss provisions.
In recent developments, digital and omni-channel sales now account for 57% of retail unit sales, indicating a strong digital presence. Net earnings per diluted share also increased by 13% to $0.85. Furthermore, CarMax conducted its first non-prime asset-backed securities transaction and is testing new credit scoring models.
The company remains optimistic about its growth prospects, with plans to centralize logistics operations and test an AI knowledge management system. An Electric Vehicle (EV) Hub has also been launched on the CarMax website to support customer education on electric vehicles.
Despite some industry-wide challenges, the company's management expects positive sales trends to continue in the second half of the year.
InvestingPro Insights
With the spotlight on CarMax's future potential, real-time data from InvestingPro offers a nuanced look at the company's current financial health and market position. As noted by CFRA analyst Garrett Nelson, CarMax is trading at a forward P/E ratio premium compared to its historical average. This is consistent with the InvestingPro data showing a current P/E ratio of 30.69, which is above the 24.4x P/E projection for FY 2026. Despite recent challenges, CarMax remains a prominent player in the Specialty Retail industry, as highlighted by one of the InvestingPro Tips.
InvestingPro data also reveals that CarMax has had a revenue decline over the last twelve months as of Q1 2023, with a decrease of 6.31%. This aligns with the analyst's expectation of a sales decline in the current year. However, the company has demonstrated cost management capabilities, reflected in an improved gross margin. This is significant considering another InvestingPro Tip points out CarMax's weak gross profit margins, suggesting that any improvement in this area could be beneficial for the company's bottom line.
Lastly, CarMax's stock price movements have been quite volatile, with a 1-month price total return showing a 12.39% decline, yet the company's liquid assets exceed its short-term obligations, indicating a level of financial stability. For investors seeking a more comprehensive analysis, InvestingPro provides additional insights, with over 10 InvestingPro Tips available for CarMax, offering a deeper dive into the company's valuation, profitability, and market trends.
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