Wedbush Analysts Note Weakening Subprime Auto Loan Performance Posing Threat To CarMax

Wedbush provided its outlook on CarMax, Inc KMX given the weakening subprime auto loan performance. According to the report published Tuesday, "The U.S. auto loan asset backed securities (ABS) subprime sector performance improved month-over-month in net losses in May, but worsened month-over-month in terms of recoveries and delinquencies, and deteriorated on a year-over-year basis in net losses, recoveries and delinquencies."

The analysts see the appeared tightening of subprime auto credit after years of risk layering by many lenders, as possible headwind for CarMax.

Related Link: Baird Lowers Earnings Forecast For CarMax, Seeing Slower Growth

"No, we are not calling for the credit meltdown of 2008, but we see credit contracting, further impacting KMX sales growth. We note that a growing pool of late-model used cars is unlikely to overcome this pressure given already ample supply, i.e., demand is the key variable. Moreover, based on new vehicle leases originated in 2013, increased supply of off-lease vehicles in 2016 is not likely to come in vehicle categories that are in high demand (e.g., SUVs and pick-up trucks)," wrote Wedbush.

The company reiterated its Neutral rating and $44 price target on the shares, assuming a 14x 2016 EPS estimate of $3.14.

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