CarMax Inc (KMX, Financial) recently experienced a daily loss of 4.35%, contributing to a 3-month decline of 20.73%. Despite these figures, CarMax boasts an Earnings Per Share (EPS) of $2.87. Investors are now faced with a critical question: is CarMax modestly undervalued? This article aims to provide a comprehensive valuation analysis to answer this question and guide potential investors.
Company Introduction
CarMax Inc (KMX, Financial) operates a vast network of approximately 240 retail stores, specializing in the sale, financing, and servicing of used and new cars. The company, which originated in 1993 as a division of Circuit City and became independent in late 2002, is recognized as the largest used-vehicle retailer in the United States. Despite its size, CarMax estimates its market share to be around 4% for vehicles aged 0-10 years as of 2022, with ambitions to surpass 5% by the end of 2025. When comparing CarMax's current stock price of $65.31 to the GF Value's fair value estimation of $91.69, it suggests that the company may be modestly undervalued.
Summarize GF Value
The GF Value is a unique measure that determines the intrinsic value of a stock by considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line suggests the fair trading value for CarMax's stock. If the stock price is significantly above this line, it may be overvalued, whereas a price below the line indicates potential undervaluation and higher future returns. Currently, with a market cap of $10.40 billion, CarMax appears to be modestly undervalued, which could imply a promising long-term return on investment.
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Financial Strength
Investing in companies with robust financial strength is crucial to mitigate the risk of permanent capital loss. CarMax's financial strength can be assessed by examining its cash-to-debt ratio and interest coverage. Currently, the company's cash-to-debt ratio stands at 0.03, positioning it weaker than 95.15% of its peers in the Vehicles & Parts industry. GuruFocus ranks CarMax's overall financial strength as 4 out of 10, which suggests that the company's financial health could be better.
Profitability and Growth
Profitable companies, especially those with consistent long-term profitability, are considered safer investments. CarMax has maintained profitability for the past decade, with a revenue of $27 billion and an Earnings Per Share (EPS) of $2.87 over the last twelve months. However, its operating margin of -1.03% ranks below that of 82.1% of industry counterparts. Despite this, CarMax's profitability is rated 8 out of 10 by GuruFocus, indicating strong profitability.
Growth is also a vital aspect of valuation. CarMax's average annual revenue growth is 15.1%, which is commendable compared to industry standards. However, its 3-year average EBITDA growth rate of -8.5% is less impressive, ranking lower than 78.3% of companies within the same industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC) provides insight into its profitability relative to the capital invested. A higher ROIC than WACC indicates value creation for shareholders. Unfortunately, CarMax's ROIC over the past 12 months was -0.85, which is lower than its WACC of 5.58, suggesting that the company is not currently generating sufficient returns on its investments.
Conclusion
Overall, CarMax (KMX, Financial) stock appears modestly undervalued. The company's financial condition could be improved, but its profitability remains robust. CarMax's growth is not leading the industry, which could be a concern for investors looking for high-growth opportunities. For those interested in a deeper dive into CarMax's financials, the company's 30-Year Financials are available for review.
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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.
