Is Carmax stock geared for higher prices?

The analysts raise Carmax price target

Carmax (NYSE: KMX) stock is geared for higher prices, the question is how high will they go? While the Q1 results were better than expected, several factors will weigh on share prices in future reporting periods. The first factor is a decline in YOY retail sales the company attributes to macroeconomic factors that we see worsening, not improving, in calendar Q3 and Q4. These include availability, higher interest rates, and rising inflation and none appear to be diminishing. If anything, inflation is still hot and will force the Fed to act more aggressively and increase the downward pressure on retail spending.

“We believe a number of macroeconomic factors weighed on our first quarter unit sales performance, including the lapping of stimulus benefits paid in the prior year period; widespread inflationary pressures, including challenges to vehicle affordability; and waning consumer confidence.”

As for the analyst, at least 2 of the 13 analysts covering the stock released commentaries in the wake of the earnings report. Both maintained their rating of Neutral and Outperform while upping the price target. Their consensus of Buy and $106.50 implies about 7% to 10% of upside for the stock compared to the Marketbeat.com consensus of Moderate Buy and $134.60, both of which have firmed over the past 30 days. The takeaway? The analysts still view this stock as a Buy and they may put a floor in the price action but the upside potential is limited for this non-dividend-paying investment.

Carmax outperforms but pricing is the reason why

Carmax had a good quarter but the two details that have us concerned are the increase in selling price and the decline in total volume. The company reported $9.3 billion in net revenue for a gain of 20.8% over last year but this is 100% because of pricing. The company reports a 5.5% decline in total unit volume that was led by the most profitable segment, Retail. On the retail end, units sold fell by 11% YOY, and 12.7% on a comp-store basis, and were offset by a $6,300 increase in average selling price. That amounts to a 25% YOY increase for a car that sold for $24,000 last year and prices are still on the rise. On the Wholesale end, the number of units sold increased by 2.7%.

The company’s margin and earnings also came in better than expected but once again it is due to pricing increases that are hurting sales volume. The company reported a $134 increase in gross profit per retail unit that helped drive the GAAP EPS to $1.56. The EPS is down more than a dollar from last year due to some one-off factors coupled with higher input costs but it beat the consensus by $0.07 which is good news. The bad news is there is no formal guidance and every reason to believe headwinds will increase.

The technical outlook: Carmax is at a bottom

The price action in Carmax is at the bottom and may even form a reversal but there are hurdles to overcome. The first is resistance at the top of the recent trading range near the $104 level. This level may cap gains in the near term but should fall based on the analyst's outlook. The low price target of $105 is above this resistance point and should lead to higher prices if reached. A move to $105 would confirm a double-bottom and may lead the market up to the $120 level before the next major resistance is hit. Longer-term, price action will most likely remain range-bound at or near the current levels.