Carmax: Now is the Time to Load Up On This Used Car Stock

Core Viewpoint - CarMax's stock price has experienced a significant decline of 25% following the Q2 earnings release, reaching levels comparable to the lows seen during the COVID-19 pandemic, which may present a potential recovery opportunity in the future [1][2]. Financial Performance - CarMax reported a challenging Q2 with a 6% contraction in revenue, falling short of consensus estimates by 600 basis points, primarily due to weak unit sales and declining sales prices [7]. - The company experienced a 5.4% decline in retail units, despite an increase in store count, and a 6.3% drop in comparable store sales [8]. - GAAP EPS was reported at $0.64, down 21% year-over-year and approximately 4000 basis points below consensus expectations [9]. Market Outlook - Analysts have a 12-month stock price forecast for CarMax at $74.00, indicating a potential upside of 62.07%, with a moderate buy rating based on 14 analyst ratings [7]. - The stock is currently viewed as a deep value at around $45.50, significantly below the low-end target, but expectations for a robust price rebound are tempered until market sentiment improves [11]. Consumer Behavior and Economic Conditions - There are indications that consumers may continue to avoid large-ticket discretionary items, such as cars, for at least another quarter or two, which could lead to underperformance until 2026 [2]. - The Federal Open Market Committee (FOMC) is expected to reduce rates by another 75 basis points by mid-2026, which could signal a potential improvement in consumer demand [4]. Institutional Activity - Approximately 96% of CarMax's stock is owned by institutions, and while there is a risk of position trimming, it seems unlikely given the outlook for cash flow and growth resumption [12]. - Institutional buying has outpaced selling in Q1 and Q3, indicating a bullish sentiment for 2025 [11].