Oppenheimer Downgrades CarMax To Perform, Cites Upcoming Tougher Comps

• Oppenheimer has downgraded CarMax in the face of tough upcoming comps
• The firm is predicting that weak used car unit numbers could trigger multiple contraction
• Analyst Brian Nagel remains positive on the longer-term outlook for CarMax

In a new report, Oppenheimer analyst Brian Nagel downgrades CarMax Inc KMX from Outperform to Perform and removes the firm’s $77 target for the stock. Although the firm remains positive on the company’s long-term outlook, Nagel sees too many near-term headwinds for the stock to outperform.

Tough comps
One of the biggest obstacles that Nagel sees ahead for CarMax is its upcoming 2014 comps. While 2014 Q2 used car units comp was just +0.2 percent, Q3 and Q4 comps jump to +7.4 percent and +7.0 percent, respectively. Oppenheimer is now calling for car unit growth of only 1-2 percent in the second half of the year, a number that will not be able to measure up to last year’s growth.

Shrinking multiple?
Oppenheimer notes that CarMax’s 3-year used car unit comp number has historically trended closely with its forward PE ratio. If this trend continues, lagging comps could soon lead to a falling multiple for the stock.

Positive long-term outlook
Nagel emphasizes in the report that he remains bullish on the longer-term outlook for CarMax.

“In the nearer term, however, we are increasingly concerned that modestly softer used car sales trends, particularly against more challenging comparisons, will further unnerve more growth-oriented investors and cap the multiple that the market is willing to ascribe to shares,” he explains.

Nagel notes that, despite the near-term challenges, the company’s steady store expansion and aggressive capital return programs will ultimately continue to increase the earning leverage of the company.

Disclosure: the author holds no position in the stocks mentioned.