CarMax Analyst Raises Price Target After Strong Q1, But Says Comp Growth Could Slow

Although CarMax, Inc KMX delivered its strongest comps since 2013 in its first-quarter report Friday, the majority of the performance was driven by temporary catalysts, according to Wedbush.

The Analyst

Seth Basham maintained a Neutral rating on CarMax and raised the price target from $65 to $80.

The Thesis

CarMax reported first-quarter results that were ahead of expectations, with 9.5% comps versus the consensus estimate of 5%, Basham said in a Monday note. (See his track record here.)

Comps accelerated significantly during the quarter, and the company cited strong conversion and favorable growth in web traffic as the reasons for the robust performance, the analyst said.

Although execution did boost comps, this was not the driving force in the quarter, as transitory factors were contributing to the ramp, he said.

These factors include a shift of tax refunds from the fourth to first quarter; increased lending to customers with lower-quality credit; and a widening gap between new and used vehicle prices, Basham said.

CarMax also indicated an increase in overall auction supply, which benefited sales and led to a decline in the company’s “self-sufficiency ratio," the analyst said.

Wedbush raised its 2019 and 2020 EPS estimates from $5.12 to $5.24 and from $5.60 to $5.71, respectively, to reflect Friday's earnings report.

Comps could slow going forward, Basham said.