On Friday, Truist Securities adjusted its outlook on CarMax Inc (NYSE:KMX), a prominent used vehicle retailer. The firm's analyst has reduced the price target on the company's shares to $72.00 from the previous $75.00 while retaining a Hold rating on the stock.
The reassessment comes in the wake of CarMax's fourth-quarter sales performance, which showed a significant decline of over 20% compared to the same period in 2019, and negative mid-single-digit comparable store sales in the current quarter to date. These figures suggest a delay in the anticipated cyclical recovery of the company's sales and earnings.
The analyst noted that CarMax has been losing market share, possibly due to less competitive pricing strategies and a potential shift in consumer buying behavior. This trend occurs even as the broader used vehicle market faces challenges related to vehicle affordability.
In the fourth quarter, CarMax's vehicle retailing segment reported a loss of approximately $55 million. Conversely, the company's CarMax Auto Finance (CAF) division generated over 100% of the earnings. The analyst pointed out that consumer finance businesses like CAF are typically valued at high-single to low-double-digit earnings multiples.
Despite the current setbacks, there is an expectation of improvement in sales and earnings for CarMax in the calendar year 2024. However, the analyst predicts that the recovery trajectory will likely be more gradual and extended than previously anticipated, leading to the decision to maintain a Hold rating on the stock.
InvestingPro Insights
Recent data from InvestingPro shows that CarMax Inc (NYSE:KMX) is navigating a challenging market landscape with a significant debt burden and analysts revising their earnings downwards for the upcoming period. The company's stock price has experienced volatility, yet it has demonstrated a strong return over the last three months, indicating some resilience amidst market pressures. According to InvestingPro, CarMax's liquid assets currently exceed its short-term obligations, which may provide some financial flexibility in the near term.
From a valuation perspective, CarMax is trading at a high EBIT valuation multiple and has a P/E ratio of 26.26, reflecting a market sentiment that anticipates future earnings growth. However, the company's sales decline of over 14% in the last twelve months as of Q1 2023, along with weak gross profit margins of 11.62%, underscores the challenges it faces in the Specialty Retail industry.
InvestingPro Tips suggest that CarMax is a prominent player in its industry but suffers from weak gross profit margins. Additionally, while analysts predict the company will be profitable this year, they also anticipate a sales decline in the current year. For readers looking to delve deeper into CarMax's financials and market position, there are 12 additional InvestingPro Tips available, which can be accessed with an exclusive 10% discount using the coupon code PRONEWS24 on a yearly or biyearly Pro and Pro+ subscription.
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