CarMax Inc (KMX, Financial) has seen a daily gain of 2.39% and a three-month gain of 13.45%. With an Earnings Per Share (EPS) of 2.91, the question arises: is the stock modestly undervalued? This article aims to provide a comprehensive analysis of CarMax's valuation and encourage readers to delve deeper into the company's financials.
CarMax Inc, the largest used-vehicle retailer in the U.S., operates through a chain of about 240 retail stores. Formed in 1993 as a unit of Circuit City, CarMax became an independent company in late 2002. The company's revenue is mainly derived from used-vehicle sales, accounting for about 83% of revenue. Despite the chip shortage in fiscal 2023, CarMax managed to retail and wholesale 807,823 and 585,071 used vehicles, respectively. With a current stock price of $83.41 and a market cap of $13.20 billion, a comparison with the GF Value suggests that the stock might be modestly undervalued.
Deciphering the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line provides a visual representation of the stock's fair trading value. If the stock price significantly deviates from the GF Value Line, it is likely to be over or undervalued, affecting its future returns.
According to GuruFocus Value calculation, CarMax (KMX, Financial) appears to be modestly undervalued. Given this undervaluation, the long-term return of its stock is likely to be higher than its business growth.
Financial Strength of CarMax
Assessing the financial strength of a company is crucial before investing. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are key indicators of financial strength. CarMax's cash-to-debt ratio of 0.01 is worse than 98.02% of companies in the Vehicles & Parts industry, suggesting poor financial strength.
Profitability and Growth of CarMax
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. CarMax has been profitable 10 times over the past 10 years. Despite an operating margin of -1.07%, which ranks worse than 81.38% of companies in the Vehicles & Parts industry, the overall profitability of CarMax is strong.
Growth is a critical factor in a company's valuation. A faster-growing company creates more value for shareholders. CarMax's 3-year average annual revenue growth of 15.1% ranks better than 75.47% of companies in the Vehicles & Parts industry. However, its 3-year average EBITDA growth rate is -8.5%, which ranks worse than 77.79% of companies in the industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) with the weighted cost of capital (WACC) provides insight into its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. For the past 12 months, CarMax's ROIC is -0.92, and its WACC is 5.6.
Overall, CarMax (KMX, Financial) stock appears to be modestly undervalued. Despite poor financial strength, the company demonstrates strong profitability. However, its growth ranks worse than 77.79% of companies in the Vehicles & Parts industry. To learn more about CarMax stock, check out its 30-Year Financials here.
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