Surprising Strength In CarMax Has Baird Raising Its Q2 Estimates

CarMax, Inc (NYSE: KMX) shares have rallied 24 percent since the weak earnings report for Q1, and Baird’s Craig R. Kennison believes the stock is fairly valued at present.

Kennison maintained a Neutral rating on the company, while raising the price target from $58 to $64.

Estimate Raised

The analyst believes CarMax sold 172,000-175,000 retail used cars during Q2, including 6-8 percent comparable used unit growth.

Accordingly, the comparable used unit growth estimate has been raised from 1 percent to 7 percent, meaningfully ahead of the consensus expectation of 1.9 percent.

“The strong pace signals a significant sequential acceleration in the two-year stack - and sets the stage for upward revisions as prior-year comparisons ease,” Kennison mentioned.

In addition, CarMax successfully completed its $1.25 billion securitization in July, with a more favorable interest spread.

Mix Shift

The analyst pointed out that the Baird model assumes that Tier 3 buyers represented 12 percent of the cars sold, as compared to 14 percent a year ago.

“The mix shift in favor of prime/near-prime buyers would benefit profitability, since CarMax pays a fee to partners that underwrite Tier 3 loans,” Kennison stated.

New CEO

In line with the succession plan announced by CarMax in February, Bill Nash was elected as the CEO, effective September 1.

“We do not expect radical change, but CarMax faces different challenges today than when Mr. Folliard became CEO in 2006. We expect the strategy to evolve over time, emphasizing growth through digital platforms,” the analyst added.

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