Omnichannel Expansion And Auto Finance Innovation To Drive Growth And Profitability

Key Takeaways

• Investment in an omnichannel experience and improved cost efficiencies can drive growth, improve profit margins, and enhance customer engagement.
  
• Expanding used vehicle sourcing and financing models may stabilize unit volumes and boost revenue and earnings.
  
• Stabilizing vehicle prices benefit CarMax, yet inflationary pressures, digital competition, and loan losses pose risks to revenue, growth strategy, and earnings.

Catalysts

Through its subsidiaries, operates as a retailer of used vehicles and related products in the United States.

• CarMax's investment in their omnichannel experience is expected to drive future growth by making it easier for customers to engage with the company both online and in-store, potentially increasing conversion rates and revenue.
  
• The company's improvement in cost efficiencies, particularly in reconditioning and logistics, is likely to continue benefiting profit margins, which would positively impact net margins.
  
• The completion of the nationwide rollout of customer shopping accounts aims to improve customer engagement and conversion, which can lead to increased sales volumes and higher revenue.
  
• CarMax's focus on expanding their used vehicle sourcing capabilities by increasing purchases from both consumers and dealers is expected to stabilize and potentially grow unit volumes, positively impacting both revenue and earnings.
  
• The ongoing testing and expansion of CarMax Auto Finance's full credit spectrum underwriting model is likely to enhance financing income, contributing positively to revenues and earnings in the future.

CarMax Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CarMax's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 4.0% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $8.16) by about December 2027, up from $461.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2027 earnings, down from 28.4x today. This future PE is lower than the current PE for the US Specialty Retail industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 1.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.92%, as per the Simply Wall St company report.

CarMax Future Earnings Per Share Growth

Risks

• The stabilization in vehicle prices is creating a more favorable environment for CarMax compared to previous periods of steep depreciation; any return to significant depreciation could adversely affect sales volumes and profit margins due to lower consumer confidence and higher markdowns on inventory. This would impact revenue and net margins.
  
• Although CarMax reports some improvements, consumer pinching due to inflationary pressures can still negatively affect sales, particularly as lower-income consumers remain cautious, potentially impacting consumer spending habits and the demand for more affordable vehicles, thereby affecting revenue growth.
  
• A significant part of CarMax's growth depends on the success of their omnichannel experience and in-store conversion improvements; any failure in execution or technology adoption could hinder growth expectations and result in increased operating costs, impacting earnings.
  
• The omnichannel experience remains critical for competitive differentiation, but rapid advancements by competitors in digital retailing could dilute this competitive advantage, presenting risks to revenue and market share.
  
• Extension policies tested by CarMax Auto Finance to aid consumers facing temporary hardships presume some effectiveness in reducing delinquencies; however, higher-than-expected charge-offs could result in greater loan losses, reducing earnings from the finance division.

Valuation

• The analysts have a consensus price target of $87.7 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 $123.0, and the most bearish reporting a price target of just $56.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $30.0 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of $84.91, the analyst's price target of $87.7 is 3.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.