Free Trial

CarMax: A Market Melt-Up Waiting to Happen for this Stock

CarMax: A Market Melt-Up Waiting to Happen for this Stock

Key Points

  • CarMax had a better-than-expected quarter, leading the market higher in premarket trading.
  • The stock is set up for a market melt-up and short-covering rally. 
  • Analysts see this stock advancing with a robust bull-case scenario aided by AI productivity gains. 
  • 5 stocks we like better than CarMax

CarMax NYSE: KMX is set up for a market melt-up because of improving market sentiment. The used car market is still struggling due to market normalization, but it is sufficient to drive solid cash flow for this business, and the trends are improving. The critical takeaway from the Q1 report is that costs are improving, vehicle value is stabilizing, demand is rebounding, and the business is set up to return to growth with leveraged earnings power. 

CarMax Today

CarMax, Inc. stock logo
KMXKMX 90-day performance
+0.77 (+0.96%)
(As of 07/22/2024 ET)
52-Week Range
P/E Ratio
Price Target

Among the drivers for the melt-up will be short interest. CarMax is among the most heavily shorted S&P 500 NYSEARCA: SPY stocks, with a short interest of 12.5% at the start of June. Since the price action in June leading up to the earnings release is not bullish, it points to an increase in short interest, not a decrease. CarMax may not be primed for a short squeeze, but short-covering will add momentum to the rally. 

Better Than Expected Results Are Why CarMax Moves Higher

CarMax struggled in Q1, with volume and pricing impacting the top and bottom lines. However, the company’s $7.11 billion in revenue outpaced the consensus reported by MarketBeat despite the 7.5% decline. The critical details are that the revenue was slightly better than expected and aided performance on the bottom line. Regarding units sold, total units fell by 5.3%, while used same-store comparable sales fell by 3.8% and wholesales by 8.3%. 

Margin news is mixed. The company improved margins in all segments, with wholesales and EPP setting records. The bad news is that one-offs in the prior and current years led to a decrease in GAAP earnings, but the decline is less than expected. The $0.97 in GAAP earnings beat by $0.02, leaving cash flow in fine shape. Cash flow is down compared to last year but sufficient to improve the balance sheet while returning capital to shareholders. 

At the end of Q1, the balance sheet highlights include a reduction in cash and current assets offset by increased total assets, reduced debt, reduced liability, and a 5.6% increase in shareholder equity. Share repurchases were accelerated in the quarter, and shareholder value was impacted. The company repurchased $104 million or about 1.4 million shares, reducing the count by 0.5% on average. Because the outlook for sales is stabilizing, with growth expected to return by year’s end, and there is still $2.26 billion authorized for repurchases, aggressive buybacks will likely continue. 

CarMax Has An Edge With AI 

CarMax MarketRank™ Stock Analysis
Overall MarketRank™
3.40 out of 5
Analyst Rating
5.6% Downside
Short Interest
Dividend Strength
News Sentiment
0.50mentions of CarMax in the last 14 days
Insider Trading
Selling Shares
Projected Earnings Growth
See Full Details

CarMax was recently called out by The Goldman Sachs Group NYSE: GS as a consumer discretionary company best positioned to benefit from AI. In their view, AI could drive 42% of earnings growth from the baseline outlook, which includes modest growth this year, which will accelerate to over 25% next year. Assuming that CarMax’s 24x multiple of this year's EPS outlook is accurate, this stock could rise by $20 or 27.75% over the next year on a simple price-multiple expansion. Add in the outlook for productivity gains, and the potential for gains is amplified.

The eleven analysts tracked by MarketBeat have a consensus of Hold for this stock and are narrowing the target range for its price. This shows a deepening conviction the stock will rise by 7.5% over the next few quarters. 

CarMax Stock Price Bottomed and is Set Up to Rebound 

CarMax’s stock price corrected following the Q4 earnings report but quickly bottomed. The market is moving within a trading range and now shows support above the range’s low end. The post-release action has the market up, suggesting a reversal is in play, but there is a risk for bulls. The market also shows resistance at the middle of the range, which may be sufficient to cap gains. In that scenario, this market will continue to move sideways within its range, with a possibility of retesting the low end. If the market can sustain upward movement and move above $72.50, it could quickly advance to the $87 level. 

CarMax KMX stock chart

→ 270x more lucrative than NVIDIA??? (From Behind the Markets) (Ad)

Should you invest $1,000 in CarMax right now?

Before you consider CarMax, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and CarMax wasn't on the list.

While CarMax currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.

View The Five Stocks Here

Reduce the Risk Cover

Market downturns give many investors pause, and for good reason. Wondering how to offset this risk? Click the link below to learn more about using beta to protect yourself.

Get This Free Report
Thomas Hughes
About The Author

Thomas Hughes

Contributing Author

Technical and Fundamental Analysis

Like this article? Share it with a colleague.

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
The Goldman Sachs Group (GS)
4.9402 of 5 stars
4.94 / 5 stars
$487.10+0.4%2.26%19.02Moderate Buy$484.59
SPDR S&P 500 ETF Trust (SPY)N/A$554.58+1.0%1.23%N/AN/AN/A
CarMax (KMX)
3.4027 of 5 stars
3.40 / 5 stars
Compare These Stocks  Add These Stocks to My Watchlist 

Featured Articles and Offers

Recent Videos

How to Trade After Hours Like a Pro
Opportunities Arise as Stock Market Rotates from Big Tech
3 Top Market Leaders Splitting Their Stocks

Stock Lists

All Stock Lists

Investing Tools

Calendars and Tools

Search Headlines