Susquehanna Sees A Road To 20% Upside In CarMax Shares

Susquehanna expects CarMax, Inc (NYSE: KMX) shares to witness a potential upside of 20 percent from current levels on long store growth runway and a potential near-term positive comp inflection.

"We view KMX as a best-in-class retailer with a promising long-term unit growth story and a favorable near-term setup," analyst Ali Faghri wrote in a note.

"In the near-term, we believe comps are near an inflection point into positive territory, which we view as an important psychological moment for shares after a streak of flat to negative comps in recent quarters," Faghri continued.

Faghri, who initiated the coverage of KMX with a Positive rating and $70 price target, noted that CarMax is benefiting from the rising industry stopsales, which have contributed to elevated inventory levels and reduced sales at franchised dealer peers. This is turn likely driving a near-term share shift to CarMax.

Moreover, the analyst pointed to recent industry data points to improving SUV/truck availability at wholesale auctions over the last few months, reversing a headwind for KMX comps in recent quarters.

Longer term, Faghri sees two factors supporting mid-single digit comps:

1) "a widening gap between used to new vehicle prices due to rising off-lease supply, which should drive strong volumes as KMX holds margin"; and

2) "reinvigorated traffic growth from a website redesign and new omni-channel initiatives."

Faghri, who expects full –year EPS of $3.33, said the company to set to report a sharp sequential acceleration in comps when it report its second quarter results on September 21. The analyst's +3.5 percent used unit comp estimate for the second quarter and +4.0 percent in the second half stands above consensus of +2.2 percent and +3.3 percent, respectively.

"While we acknowledge concerns about KMX's third-party subprime volatility and a more demanding valuation recently, investors have been historically rewarded by buying KMX shares ahead of comp reacceleration periods, justifying a Positive rating in our view," Faghri added.

At time of writing, shares of CarMax were up 1.44 percent to $59.22. Based on Thursday's close, the $70 price target represents a potential upside of 19.9 percent.