CarMax Inc (KMX, Financial) has recently experienced a notable decline, with a daily loss of 5.56% and a three-month drop of 24.41%. Despite these setbacks, the company boasts an Earnings Per Share (EPS) of $2.87. Investors are faced with the question: Is CarMax modestly undervalued? This article aims to delve into the valuation analysis of CarMax, providing readers with a detailed assessment of its current market position and future prospects.
Company Overview
CarMax Inc (KMX, Financial) operates a robust chain of approximately 240 retail stores, specializing in the sale, financing, and servicing of used and new cars. Established in 1993 as a unit of Circuit City and later becoming an independent entity in 2002, CarMax has grown to become the largest used-vehicle retailer in the United States. Despite holding only about 4% market share for 0-10 year-old vehicles in 2022, CarMax aims to increase this to over 5% by the end of 2025. With a market cap of $10.20 billion, CarMax's current stock price of $64.15 contrasts with the GF Value of $88.67, suggesting that the stock might be modestly undervalued.
Understanding GF Value
The GF Value is a proprietary metric that estimates the intrinsic value of a stock. It incorporates historical trading multiples, an adjustment factor based on past performance, and projected future business outcomes. The GF Value Line serves as a benchmark for the stock's fair trading value. When a stock's price significantly exceeds the GF Value Line, it may be overvalued, indicating a potential for poor future returns. Conversely, a price well below the GF Value Line suggests undervaluation and the possibility of higher future returns. Currently, CarMax (KMX, Financial) appears modestly undervalued, which could signal more attractive long-term returns relative to its business growth.
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Financial Strength Assessment
When investing, assessing a company's financial strength is crucial to avoid permanent capital loss. CarMax's cash-to-debt ratio of 0.03 ranks lower than 94.44% of its industry peers, indicating a weaker financial position. GuruFocus rates CarMax's financial strength as 4 out of 10, reflecting concerns about its balance sheet.
Profitability and Growth Prospects
A company's profitability is often a reliable indicator of its risk level and performance potential. CarMax has maintained profitability for 10 years, with $27 billion in revenue and an Earnings Per Share (EPS) of $2.87 over the past 12 months. However, its operating margin of -1.03% is lower than 81.96% of its industry counterparts. Despite this, CarMax's profitability is considered strong.
The growth of a company is intrinsically linked to the long-term performance of its stock. CarMax's 3-year average revenue growth rate outperforms 75.17% of the industry, yet its 3-year average EBITDA growth rate of -8.5% is lower than 78.22% of its competitors, indicating mixed growth signals.
ROIC vs. WACC Analysis
Evaluating a company's profitability can also be achieved by comparing its Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC). Ideally, the ROIC should exceed the WACC to create shareholder value. CarMax's ROIC of -0.85 is below its WACC of 5.77, suggesting inefficiencies in generating cash flow relative to invested capital.
Concluding Insights
In conclusion, CarMax (KMX, Financial) presents as modestly undervalued, with solid profitability but poor financial health and mixed growth indicators. To gain a deeper understanding of CarMax's financial journey, investors can explore its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
