Last Update10 Oct 25Fair value Decreased 25%
CarMax's fair value estimate has been revised sharply lower, dropping from $76.93 to $57.79. Analysts point to mounting sales uncertainty, downward earnings revisions, and lack of visible turnaround strategies following weaker-than-expected Q2 results and multiple price target cuts across the Street.
Analyst Commentary
Following CarMax's recent quarterly results and downward valuation revisions, Wall Street analysts have offered a range of perspectives regarding the company's prospects. The commentary reflects diverging views on CarMax's potential for recovery, execution risks, and the evolving competitive landscape in used car retailing.
Bullish Takeaways
- Bullish analysts highlight the company's underlying asset value and note that recent earnings disappointments may be partially attributable to one-time or short-term issues within specific loan vintages.
- Some foresee a potential recovery in unit growth, suggesting that unit declines in the latest quarter could reverse if macro conditions stabilize or CarMax implements targeted operational improvements.
- Raised price targets from select major institutions indicate continued belief in CarMax's long-term value proposition, even while acknowledging recent execution shortfalls.
- Outperform and Buy ratings are maintained by a handful of firms, who see the company as well-positioned to benefit should loan losses moderate and retail trends recover.
Bearish Takeaways
- Bearish analysts express concern over the lack of a clear turnaround strategy or visibility into renewed growth, especially in the aftermath of disappointing sales and margin performance during Q2.
- There are fears of a new downside phase for CarMax, with risks of further year-over-year declines in both unit volume and retail gross profit per unit.
- Increased competitive pressures and supply headwinds are seen as likely to persist. Some analysts are reducing their financial forecasts through fiscal 2027 and applying lower valuation multiples to reflect these risks.
- Several price target reductions and rating downgrades highlight wariness over CarMax's ability to reclaim market leadership, with continued questions about management's response to ongoing challenges.
What's in the News
- CarMax completed the repurchase of 2,920,959 shares between June 1, 2025 and August 31, 2025. This brings the total shares repurchased under its ongoing buyback program to 109,170,862, representing 58.32% of shares and totaling $6.99 billion (Key Developments).
- CarMax, Inc. (NYSE:KMX) was dropped from the FTSE All-World Index (USD) (Key Developments).
Valuation Changes
- Fair Value Estimate has fallen significantly from $76.93 to $57.79, reflecting reduced confidence in future prospects.
- Discount Rate remains unchanged at 12.32%, indicating no shift in risk assumptions by analysts.
- Revenue Growth forecast has declined sharply from a positive 1.88% to a contraction of -0.30%. This suggests a more challenging outlook for sales expansion.
- Net Profit Margin is slightly lower, adjusted from 3.52% to 3.39%. This signals modest compression in expected profitability.
- Future P/E Ratio has decreased from 13.17x to 10.79x. This implies a lower earnings multiple due to growth and earnings revisions.
Key Takeaways
- Growth in digital sales channels and improved vehicle sourcing are expected to boost market share, revenue, and gross profit margins.
- Expansion of credit spectrum lending and cost reductions aim to enhance financing income, profitability, and net margins.
- Macroeconomic and competitive pressures challenge CarMax's margins and growth, with rising inventory and loan costs and uncertainties affecting profitability and strategic clarity.
Catalysts
About CarMax- Through its subsidiaries, operates as a retailer of used vehicles and related products in the United States.
- CarMax's growth in digital sales channels, including an increase in omnichannel sales, positions the company to expand its market share and boost revenue in the future. The ongoing enhancements to their digital tools are expected to further integrate online and in-store sales.
- Expansion in the company's vehicle sourcing capabilities, particularly through dealer channels and improved consumer experience, is intended to support unit volume growth and improve gross profit margins by lowering vehicle acquisition costs.
- CarMax's initiative to broaden its full credit spectrum lending capabilities through CarMax Auto Finance (CAF) is expected to increase CAF income and net interest margins over time. This initiative aims to capture more sales and improve financing income, impacting earnings positively.
- The continued focus on operational efficiencies and planned cost reductions in logistics and reconditioning are expected to support stable or increased net margins and profitability as savings enhance the bottom line.
- Planned investments in new store locations and reconditioning centers are intended to increase the company's physical footprint and operational capacity, driving revenue growth through expanded service capacity and higher vehicle sales.
CarMax Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- Analysts are assuming CarMax's revenue will grow by 1.3% annually over the next 3 years.
- Analysts assume that profit margins will increase from 1.9% today to 3.1% in 3 years time.
- Analysts expect earnings to reach $919.9 million (and earnings per share of $6.49) by about September 2028, up from $558.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.1 billion in earnings, and the most bearish expecting $532 million.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, up from 16.5x today. This future PE is lower than the current PE for the US Specialty Retail industry at 18.7x.
- Analysts expect the number of shares outstanding to decline by 3.13% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.
CarMax Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- CarMax reported a decline in wholesale gross profit per unit, which can raise concerns about maintaining or growing gross margins if this trend continues.
- The competitive pressure in the vehicle sourcing arena, especially with significant gains in dealer-sourced inventory, introduces risks to inventory acquisition costs, and could potentially compress gross profit margins.
- As the company expands its full credit spectrum lending, CarMax faces potential increased provisioning for loan losses. This could affect its net interest margins and overall profitability if not managed effectively.
- Macroeconomic factors such as potential tariffs and rising new car prices could lead to volatility in car prices and parts costs. This poses a risk to cost of goods sold and could pressurize service margins.
- The decision to withdraw specific timelines for long-term goals due to macroeconomic uncertainty might indicate challenges in maintaining growth momentum, which could impact revenue and earnings visibility.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $81.438 for CarMax based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $52.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $29.8 billion, earnings will come to $919.9 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 12.3%.
- Given the current share price of $61.38, the analyst price target of $81.44 is 24.6% higher.
- We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.
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Disclaimer
AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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