Mizuho Securities analyst David Bellinger lowered the price target and earnings estimates for CarMax (NYSE:KMX) ahead of the company’s first quarter Fiscal 2025 print. CarMax is scheduled to release the results for the three months ending May 31, 2024, before the market opens on June 21. Bellinger maintained a Hold rating on KMX stock while cutting the price target to $72 from $75. The revised price target implies that shares are almost fully valued at current levels.
In the to-be-reported quarter, the Street expects CarMax to post diluted earnings per share (EPS) of $0.95 on net revenues of $7.16 billion. This represents a significant decline from Q1 FY24 when CarMax posted diluted EPS of $1.44 on net revenues of $7.69 billion.
CarMax is one of America’s largest used car retailers. It operates through an omnichannel platform in the retail, wholesale, and auto financing domains. The company has been under constant pressure as price-sensitive customers are hesitating to make purchases at elevated prices amid macro headwinds. KMX shares have declined more than 9% in the past year.
Bellinger Lowers Price Target and EPS Estimates
After checking used car sales data, Bellinger believes that the prices for used autos still remain at more than 30% over 2019 levels, impacting the purchasing power of lower-end customers. The analyst also expects a slower pace of tax refunds to weigh on the results. At the same time, CarMax is losing market share to rival Carvana (NYSE:CVNA), which is purchasing additional vehicles at or lower than $20,000 per unit. Notably, vehicles priced at $20,000 or less account for only 28% of the total listed cars for CarMax as against 40% for Carvana.
Accordingly, Bellinger revised the used car comparable sales growth estimate to -4% from the previous guide of -1%. Also, the EPS forecast for Q1 is now revised downwards to $0.98 from $1.12. Despite the recent drop in the used car price index, Bellinger believes that a more significant decline is required to incentivize additional demand in the coming months.
The analyst’s revised price target is based on a 20x lowered FY25 EPS forecast of $3.60. Bellinger prefers to remain sidelined on CarMax shares until there is further clarity on both the industry supply and auto affordability trends.
Bellinger also pointed out a few other headwinds that could pose a challenge for CarMax going forward. These include diminishing consumer spending, increased competition, elevated fuel costs, insurance, and other car-owing expenses. Moreover, the higher penetration of ride-hailing services limits the demand for new as well as used autos. Meanwhile, a weak credit scenario and margin compression could impact the CarMax Auto Finance (CAF) business, leading to further deterioration.
Is CarMax a Good Stock to Buy?
Wall Street remains divided on CarMax stock’s trajectory. On TipRanks, KMX stock has a Moderate Buy consensus rating based on six Buys, four Holds, and one Sell rating. The average CarMax price target of $80.30 implies 12.3% upside potential from current levels.
Ending Thoughts
Analyst Bellinger’s cautious stance on CarMax stock stems from the perceived risk of high used car prices and declining market share. Analysts and investors will keenly watch for management’s commentary on the expected ramp-up in unit sales and price softness.
