Today, CarMax Inc (KMX, Financial) showcased a notable daily gain of 4.09%, with a modest three-month gain of 1.72%. With an Earnings Per Share (EPS) of 3.03, investors and analysts are keen to determine: Is CarMax fairly valued at its current price? This analysis delves into CarMax's valuation, encouraging readers to explore the intricate details of its market positioning.
Company Overview
CarMax Inc (KMX, Financial), established in 1993 and spun off from Circuit City in 2002, operates as the largest used-vehicle retailer in the United States. Despite its size, CarMax estimates a modest U.S. market share of approximately 3.7% for vehicles aged 0-10 years as of 2023, with aspirations to expand this share in the coming years. The company's revenue streams are primarily derived from used-vehicle sales, which typically account for about 83% of total revenue, with the remainder coming from wholesale vehicle sales and other services.
Understanding the GF Value
The GF Value is a proprietary measure calculated to represent the intrinsic value of a stock. It integrates historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and estimated future business performance. According to this measure, CarMax appears to be fairly valued with a GF Value of $77.95, closely aligning with its current stock price of $74.64. This assessment suggests that the stock price of CarMax is likely to perform in tandem with the company's business growth over the long term.
Financial Strength and Risks
Investing in companies with robust financial health is crucial to mitigate the risk of capital loss. CarMax's cash-to-debt ratio of 0.03, ranking lower than 94.04% of its peers, reflects a potential area of concern. This financial metric suggests that CarMax's financial structure might be leveraged more heavily than ideal, which could pose risks during economic downturns. The company's financial strength, therefore, receives a GuruFocus rating of 4 out of 10.
Profitability and Growth Prospects
CarMax has maintained profitability over the past decade, a testament to its solid business model and operational efficiency. However, its operating margin of -0.78% ranks lower than 81.59% of its industry peers, indicating room for improvement in operational efficiency and cost management. The company's revenue growth rate stands at 13.4% annually, which is commendable and suggests that CarMax is capable of scaling its operations effectively.
ROIC vs. WACC: A Critical Metric
Comparing the Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC) provides insights into how well CarMax is generating returns relative to its capital costs. Currently, CarMax's ROIC of -0.61% is below its WACC of 6.67%, indicating that the company is not generating adequate returns on its investments, which could be a red flag for potential investors.
Conclusion
In conclusion, CarMax (KMX, Financial) presents a mixed financial picture. While the company is fairly valued according to the GF Value, indicating that its stock price aligns with its intrinsic value, concerns regarding its financial strength, profitability, and investment returns remain. For those interested in a deeper exploration of CarMax's financials, further details can be found in 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.
