CarMax Inc (KMX, Financial) recently experienced a daily loss of -2.58%, with a slight 3-month change of -0.18%. Despite these short-term fluctuations, the company's Earnings Per Share (EPS) stand at $2.87. Investors often grapple with the question of whether a stock is fairly valued. To determine this for CarMax, a closer examination of its intrinsic value is essential.
Read on as we delve into the valuation analysis of CarMax (KMX, Financial), exploring whether its current market price aligns with its true worth.
Company Overview
CarMax Inc (KMX, Financial) operates a robust network of approximately 240 retail stores, specializing in the sale, financing, and servicing of used and new cars. Established in 1993 as a division of Circuit City and later spinning off in 2002, CarMax has grown to become the largest used-vehicle retailer in the United States. Despite commanding a mere 4% market share for 0-10-year-old vehicles in 2022, CarMax aims to surpass 5% by the end of 2025. With headquarters in Richmond, Virginia, the company's revenue streams are mainly from used-vehicle sales (83%) and wholesale activities (13%).
Comparing CarMax's current stock price of $76.52 to the GF Value of $81.06 offers a preliminary gauge of its valuation. This juxtaposition sets the stage for an in-depth analysis of CarMax's financial standing and market potential.
GF Value Explained
The GF Value is a unique metric that assesses 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 acts as a benchmark, suggesting the fair value at which the stock should trade.
For CarMax (KMX, Financial), the GF Value indicates that the stock is fairly valued at its current price, with a market cap of $12.10 billion. This assessment is based on historical trading patterns, company-specific adjustments, and future performance projections. When a stock trades significantly above the GF Value Line, it may be overvalued, potentially leading to poor future returns. Conversely, if it trades below this line, it could be undervalued, suggesting higher future returns.
Given CarMax's alignment with the GF Value, investors can expect the stock's long-term returns to approximate the company's business growth rate.
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Financial Strength Assessment
Investors must consider a company's financial strength to avoid the risk of permanent capital loss. Key indicators such as the cash-to-debt ratio and interest coverage can provide insights into financial health. CarMax's cash-to-debt ratio stands at 0.03, ranking lower than 95.19% of its industry peers. With an overall financial strength rating of 4 out of 10, CarMax's financial position is considered poor.
Profitability and Growth Prospects
A consistent track record of profitability reduces investment risk. 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 -0.66% ranks lower than 81.45% of the industry. The overall profitability rank of 7 out of 10 suggests fair profitability for CarMax.
Growth is a critical valuation component, as it is closely tied to long-term stock performance. CarMax's 3-year average annual revenue growth of 15.1% outperforms 74.67% of its industry counterparts. However, its 3-year average EBITDA growth rate of -8.5% ranks below 78% of the industry, indicating areas for potential improvement.
ROIC vs. WACC Analysis
Comparing a company's Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC) reveals its value creation efficiency. CarMax's ROIC of -0.53 is less than its WACC of 5.98, suggesting that the company is not currently creating value for shareholders.
Conclusive Insights
In conclusion, CarMax (KMX, Financial) appears to be fairly valued according to the GF Value metric. Despite this, the company's financial condition is weak, with only fair profitability and growth rankings that fall below industry averages. To gain a deeper understanding of CarMax's financial trajectory, investors are encouraged to review 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.
