New CarMax Price Target as Trump Auto Tariffs Boost Used Car Outlook
We're picking between two bullish setups for the auto dealer.
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Looking at a one-year chart, the shares of CarMax KMX peaked in December 2024 at $91.25.
At the stock's May low of $61.34, KMX was down 33% from that lofty apex. The nasty trend, of course, is longer than one year long. In November 2021, KMX traded at its all-time high of $155.98. From that spot, down to May's low was a gnarly looking haircut of 60.7%. Ouch. The stock has stabilized of late and technically has a couple of bullish setups that have developed. Usually, I get excited when I see one clearly defined, well-developed bullish setup. CarMax has two. Investors get to pick their favorite among the two.
Let's sign in, shall we?
Earnings
Early on Friday morning, CarMax released the firm's fiscal first quarter financial results. For the three-month period ended May 3, CarMax posted a GAAP EPS of $1.38 on revenue of $7.547 billion. These top- and bottom-line results both beat Wall Street's expectations, the bottom line quite decisively so. That compared to the year-ago EPS of $0.97 on revenues that were good enough for year-over-year growth of 6.2%. This was the second straight quarter of year-over-year sales growth after eight consecutive quarters of year-over-year sales contractions. This was also the fastest pace of year-over-year sales growth since the fiscal first quarter of 2022.
Retail used unit sales increased by 9%, while comp store unit sales increased 8.1%. Wholesale unit sales grew 1.2%. Gross profit per retail used unit sale grew $60 to $2,407, while extended protection plans margin per retail unit sale grew $9 to $572. Service margin printed at $143 per retails unit, up a stunning $128 from a year ago.
Interesting
Though the average sale price for a used car at CarMax was down 1.5% to $26,120, the 9% increase in sales more than made up for that. This is partly due to improved execution at the firm and partly due to President Trump's automobile tariffs that have impacted U.S. new auto supplies as well as prices. Hence, the increased demand for used cars.
It's key to note that CarMax will hold the firm's annual (virtual) shareholder meeting this coming Tuesday (June 24). There's sure to be more information released at that time.
Fundamentals
For the period reported, CarMax generated operating cash flow of $299.543 million, up from the year ago comparison of -$117.689 million. After accounting for capex spending, free cash flow printed at $162.807 million, up from -$221.603 million. The firm repurchased and retired $204.027 million worth of common stock but does not pay cash dividends out to shareholders.
As far as the balance sheet goes, CarMax ended the quarter with a cash position of $262.819 million and inventories of $3.624 billion. That put current assets at $5.453 billion. Current liabilities add up to $2.277 billion including a whopping $750.106 million in normal debt and non-recourse notes payable labeled as current.
That means that the value of the inventories has to hold up well, and so far in 2025, it looks like it is. The firm's current and quick ratios stand at very healthy looking 2.39 and 0.80, respectively. Given the nature of this business, the current ratio below the 1.0 level is not as scary as it otherwise might be.
Total assets amount to $27.386 billion, of which only a tiny percentage is labeled as "goodwill." I don't see any other intangibles on the balance sheet. Total liabilities less equity comes to $21.099 billion. Total debt (excluding the current portion) adds up to a scary looking $18.006 billion. The firm can pay its bills, but the debt load is enough to make me think of KMX as more of a candidate for a trade than an actual investment.
The Charts
Two nice setups. Investors can choose:
KMX is breaking out from a falling wedge pattern of bullish reversal with a pivot of $64, which is where it cracked the pattern to the upside. Relative strength is improving and has just crossed the line of neutrality. The daily MACD is not perfect, but the histogram of the nine-day EMA has gone positive, while the 12-day EMA has just crossed above the 26-day EMA. Those two lines have to get themselves into positive territory with the 12-day line staying above the 26-day line for the bullish posture to remain intact.
Behind door number two, we have a double-bottom pattern of bullish reversal with a $70 pivot, which is the apex of the central pop of the "W" formation. Because I have had better success over the year with double bottoms than with rising wedges and because the pivot is higher for the double bottom, this is the pattern I think I am going to favor.
Watch closely for support at the 50-day SMA (currently $66.10). Should that hold firm into the weekend, I think we'll have ourselves a ballgame.
CarMax (KMX)
Target Price: $81
Pivot: $70
Add: Down to the 50-day SMA
Panic: On Loss of the 50-day SMA
At the time of publication, Guifoyle had no positions in any securities mentioned.
