Online Strategy Helping CarMax Move from Defense to Offense, Says Morgan Stanley

Morgan Stanley while reiterating an “Overweight” rating and the price target of $165 on CarMax in its last week’s report said the Richmond, Virginia-based used car company’s online strategy is helping it move from defense to offense.

This comes just after the used-car retailer reported fiscal third-quarter earnings results on Wednesday, December 22. The company said its net earnings per share came in at $1.53, beating the Wall Street consensus estimate of $1.50.

The company said its revenue jumped nearly 65% to $8.53 billion for the November-end quarter from $5.18 billion a year ago. That was also above the market expectations of $7.89 billion.

Still, CarMax continues to experience margin pressure due to expensive inventory procurement and a higher working capital burden on free cash flow.

“Management has executed exceptionally during the LTM to take advantage of an extremely strong macro environment (rise in used car prices, fiscal stimulus, shift to used vs. new). In CY 2022, we expect continued elevated spend in SG&A across: hiring workers, logistics, building out tech and website capabilities,” noted Adam Jonas, equity analyst at Morgan Stanley.

“We do expect revenue momentum to slow down, off a strong base in CY21. Nonetheless, we are bullish on KMX’s omnichannel strategy and believe it has the network capability and infrastructure to leverage and become a successful platform for both online and in-store used car purchases. We expect KMX to continue to compound over the long-term and see KMX as a formidable player to CVNA, albeit becoming the number 2 competitor nationally in the medium to long-term.”

Morgan Stanley gave the stock price forecast of $250 under the bull scenario and $80 under the worst-case scenario. Other equity analysts also updated their stock price outlook. Wedbush slashed the target price to $140 from $160. RBC raised the target price to $157 from $156. JPMorgan lifted the price objective to $160 from $140.

Nine analysts who offered stock ratings for CarMax in the last three months forecast the average price in 12 months of $158.57 with a high forecast of $170.00 and a low forecast of $140.00.

The average price target represents a 25.54% change from the last price of $126.31. Of those nine analysts, seven rated “Buy”, two rated “Hold” while none rated “Sell”, according to Tipranks.

On Thursday, CarMax shares closed 1.22% lower at $126.31. The stock surged over 30% so far this year.

“Based on historical & current data, we expect to see strength in used car sales as we move forward, particularly given the shortage of new car inventory, manufacturers pulling back on incentives, and potential tailwinds from de-urbanization, mass transit, ride-sharing, and travel. We expect CarMax (KMX) to successfully execute their Omnichannel strategy, providing both online and physical dealer options to consumer,” Morgan Stanley’s Jonas added.

“KMX has consistently generated >$2,000 GPU, and has one of the strongest balance sheets amongst the dealers. Long term, we estimate strong growth in same-store sales along new store openings, allowing KMX to achieve operating leverage, with upside from the omni-channel rollout.”

However, technical analysis suggests it is good to hold now as 100-day Moving Average and 100-200-day MACD Oscillator signals a mild selling opportunity.

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