Mizuho cuts CarMax stock target on affordability concerns

On Friday, Mizuho Securities adjusted its outlook on CarMax (NYSE:KMX), the United States' largest retailer of used cars. The firm reduced its price target on the company's shares to $75 from the previous $80 while maintaining a Neutral rating.

This revision follows CarMax's recent disclosure of its fourth-quarter results and subsequent discussions with the company's top executives, including CEO Bill Nash and CFO Enrique Mayor-Mora.

According to the firm, despite a noticeable increase in customer interest for used vehicles, reflected in higher digital traffic and finance applications, actual sales transactions are being hindered by ongoing affordability issues.

CarMax has been experiencing an upward trend, marking its fifth consecutive quarter of sequential comparable sales improvement. The company has also provided guidance suggesting expense leverage on a low single-digit percentage increase in gross profit growth.

Nevertheless, Mizuho anticipates that revenue challenges will persist throughout the fiscal year 2024, potentially dampening the prospects for a return to more normalized earnings per share (EPS) growth.

Early indicators for the first quarter appear to support the firm's cautious stance, suggesting that a more robust multi-year recovery for CarMax might still be in its nascent stages. Consequently, Mizuho has revised its estimates downward, aligning the price target with the new forecast.

As we delve deeper into CarMax's (NYSE:KMX) financial health and market performance, InvestingPro data reveals a nuanced picture. The company's market capitalization stands at a solid $11.34 billion, reflecting its stature in the Specialty Retail industry. However, with a Price to Earnings (P/E) ratio of 26.26 and an adjusted P/E ratio for the last twelve months as of Q3 2024 at a similar level of 26.28, investors may find the stock trading at a premium compared to earnings.

CarMax's revenue growth has seen a decline of 14.53% over the last twelve months as of Q3 2024, which aligns with Mizuho Securities' concerns about the company's revenue challenges. Despite this, CarMax has managed a strong return over the last three months, with a price total return of 19.08%. This performance could indicate resilience in the face of sector-wide headwinds. Additionally, the company's gross profit margin stands at 11.62%, which, while not robust, is a critical indicator of its ability to manage costs relative to its revenue.

InvestingPro Tips highlight that CarMax operates with a significant debt burden and analysts have recently revised their earnings expectations downwards for the upcoming period, suggesting that investors should keep a close eye on these developments. For a more comprehensive analysis and additional insights, readers can explore the full suite of tips available on InvestingPro, including details on CarMax's volatility and liquidity. Moreover, for those looking to deepen their investment research, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. Currently, there are 13 additional InvestingPro Tips for CarMax that can further guide investment decisions.

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