CarMax Bears The Brunt Of Uncertain Macro, Competition & Uncertainties In Used-Car Markets: Analysts

RBC Capital Markets analyst Steven Shemesh reiterated an Outperform rating on CarMax Inc KMX, lowering the price target to $80 from $90.

KMX's net revenues were $7.1 billion, down 13.1% from the prior year's second quarter.

Shemesh thinks the quarter had several puts and takes, but weaker-than-anticipated comps ultimately drove a modest EPS miss and sell-off on the day of the earnings report. 

While strong cost discipline is a positive thing, the analyst cautioned that growing affordability issues are likely to put a lid on the upside in the near future.

Also Read: Deflation Rocks Used Car Market, Price Bubble Bursts: 5 Stocks Face Margin Squeeze Risks

The decline in Comp Used Vehicle units by 9% is perceived as worse than expected, especially given that industry data indicated a decrease of around 4-5%.

The analyst notes that Retail Average Selling Price (ASP) is still approximately 34% higher than comparable 2019 levels, posing questions on whether the pricing has another meaningful leg down, given the growing affordability issues.

Based on the above, the analyst lowered the FY24 EPS estimate to $3.19 from $3.39.

For FY25, Shemesh lowered the EPS estimate to $4.00 from $4.28.

Needham analyst Chris Pierce reiterated a Hold rating on KMX.

On a bearish tone, the analyst writes that KMX is seeing heightened competition from digitally native operators and bulked-up franchise dealers post-industry consolidation while having less leverage to the lower end of the used vehicle market, where the initial recovery appears to be taking shape.

Specifically, KMX appears to over-index to less seasoned, higher-priced used vehicles, while current demand is over-indexing to used vehicles at the lower end of the price spectrum, given consumer uncertainty and higher interest rates.

The analyst lowered the FY24 EPS estimate to $3.06 from $3.89. Pierce lowered the FY25 EPS estimate to $4.03 from $4.95

Price Action: KMX shares are trading higher by 2.12% to $70.47 on the last check Friday.