RBC Raises CarMax Price Target, Says Headwinds Will Ease

Used car retailer CarMax, Inc (NYSE: KMX) reported weakness in its past few quarters, but any headwinds should now ease moving forward, according to RBC Capital Markets.

The Analyst

RBC's Scot Ciccarelli maintains an Outperform rating on CarMax with a price target lifted from $86 to $92.

The Thesis

Ciccarelli said recent weakness in CarMax's earnings can be attributed to three factors: elevated prices in used cars, unfavorable omni-channel capabilities versus its peers and struggles with "value" rankings on marketplace windows.

All three factors will ease moving forward, the analyst wrote in a note.

First, depreciation patterns in used autos are likely to normalize back to historical norms which will create a better environment for CarMax as it offers consumers better value propositions versus buying new.

Second, CarMax introduced new omni-channel capabilities in test markets which posted comps in the double-digit range in the fourth quarter. The company plans on expanding its omni-channel capabilities to Florida in the near term with the objective of expanding to most of its major markets by February 2020.

Third, CarMax typically has a small number of vehicles for sale that rank as a great deal or good deal in third-party marketplace platforms, like CarGurus (NASDAQ: CARG). The analyst said this headwind, for the most part, remains "largely unaddressed" but should improve over time as the new omni-channel capabilities could offer a solution to improving its offerings versus Carvana (NYSE: CVNA).

Price Action

Shares of CarMax closed Wednesday at $83.49.

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