Despite a daily gain of 2.05%, CarMax Inc (KMX, Financial) has experienced a 3-month loss of -8.58%. With an Earnings Per Share (EPS) (EPS) of 2.91, the question arises: is the stock significantly undervalued? This article aims to provide an in-depth analysis of CarMax's valuation, encouraging readers to delve into the following financial insights.
CarMax Inc, based in Richmond, Virginia, specializes in selling, financing, and servicing used and new cars through about 240 retail stores. Established in 1993 as a unit of Circuit City, CarMax spun off into an independent company in late 2002. The company has dominated the used-vehicle retailing industry in the U.S., holding an estimated 4% market share of vehicles 0-10 years old in 2022. Despite the chip shortage affecting its revenue in fiscal 2023, CarMax aims to increase its market share to over 5% by the end of calendar 2025.
The GF Value of CarMax
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical multiples that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
With a current price of $78.23 per share, CarMax (KMX, Financial) appears to be significantly undervalued. The stock's fair value, calculated based on historical multiples, past business growth, and analyst estimates of future business performance, indicates a potential for high future returns.
Given that CarMax is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Financial Strength of CarMax
Investing in companies with poor financial strength can lead to a higher risk of permanent loss of capital. Therefore, it is crucial to review the financial strength of a company before deciding whether to buy its stock. CarMax's cash-to-debt ratio of 0.01 is worse than 98.21% of 1230 companies in the Vehicles & Parts industry, indicating poor overall financial strength.
Profitability and Growth
Consistent profitability over the long term offers less risk for investors. CarMax has been profitable for 10 out of the past 10 years. Despite an operating margin of -1.07%, which ranks worse than 81.26% of 1265 companies in the Vehicles & Parts industry, the overall profitability of CarMax is strong.
However, the growth of CarMax ranks worse than 77.85% of 1079 companies in the Vehicles & Parts industry. The average annual revenue growth of CarMax is 15.1%, but the 3-year average EBITDA growth is -8.5%.
ROIC vs WACC
By comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC), one can evaluate a company's profitability. CarMax's ROIC of -0.92 is less than its WACC of 5.51, indicating a potential risk for shareholders.
In summary, the stock of CarMax (KMX, Financial) gives every indication of being significantly undervalued. Despite the poor financial condition, the profitability of CarMax is strong. To learn more about CarMax stock, you can check out its 30-Year Financials here.
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