As reflected at the current price of $69, what future CarMax operating performance is the market anticipating? To achieve average annual stock market performance of 9.0% over the next 6 years, CarMax shares will need to reach $115. To achieve Upper quartile performance, CarMax’s stock price will need to reach $136 by 2030.
Executive Summary
- CarMax’s important characteristics: above average expected growth, stability, low profitability, and low financial strength. A big negative influence on CarMax’s valuation is its poor Risk Profile.
- Low valuation, lagging shareholder returns. Current valuation levels are below average relative to the CarMax Peer Group. Recent market returns have substantially underperformed the CarMax Peer Group. Total shareholder returns expected to significantly beat the overall equity market. Based on current investor expectations, CarMax shares should reach a level of $189 by 2030 — an 18.4% per year total shareholder return. A 2030 stock price of $115 would reflect median performance and a price of $136 would be required to reach upper quartile performance.
- CarMax’s achieved growth is modestly above average. Historical growth has been high relative to the CarMax Peer Group and forecasted growth is relatively high. Asset Growth, and Equity Growth have been superior. EPS Growth has lagged. CarMax’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth driving erosion in return on equity. CarMax’s consensus growth expectations are lower than historical growth.
- Pretax Margin, and Pretax ROA are group lagging. These factors have negatively affected market perceptions of CarMax. The company has normal cash needs.
- Risk Profile has been CarMax’s biggest valuation weakness. CarMax’s risk profile is unfavorable. Overall variability has been very high with very high revenue variability, very low E.P.S. variability, and above average stock price volatility. Financial Strength is very low and earnings’ expectations are very low. The debt/capital ratio has been relatively steady.
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