Auto Credit Trends And Digital Expansion Will Shape Dealer Reach Ahead

Key Takeaways

• Growth in digital sales channels and improved vehicle sourcing are expected to boost market share, revenue, and gross profit margins.
  
• Expansion of credit spectrum lending and cost reductions aim to enhance financing income, profitability, and net margins.
  
• Macroeconomic and competitive pressures challenge CarMax's margins and growth, with rising inventory and loan costs and uncertainties affecting profitability and strategic clarity.

Catalysts

Through its subsidiaries, operates as a retailer of used vehicles and related products in the United States.

• CarMax's growth in digital sales channels, including an increase in omnichannel sales, positions the company to expand its market share and boost revenue in the future. The ongoing enhancements to their digital tools are expected to further integrate online and in-store sales.
  
• Expansion in the company's vehicle sourcing capabilities, particularly through dealer channels and improved consumer experience, is intended to support unit volume growth and improve gross profit margins by lowering vehicle acquisition costs.
  
• CarMax's initiative to broaden its full credit spectrum lending capabilities through CarMax Auto Finance (CAF) is expected to increase CAF income and net interest margins over time. This initiative aims to capture more sales and improve financing income, impacting earnings positively.
  
• The continued focus on operational efficiencies and planned cost reductions in logistics and reconditioning are expected to support stable or increased net margins and profitability as savings enhance the bottom line.
  
• Planned investments in new store locations and reconditioning centers are intended to increase the company's physical footprint and operational capacity, driving revenue growth through expanded service capacity and higher vehicle sales.

CarMax Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CarMax's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 3.1% in 3 years time.
• Analysts expect earnings to reach $919.9 million (and earnings per share of $6.49) by about September 2028, up from $558.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.1 billion in earnings, and the most bearish expecting $532 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, up from 16.5x today. This future PE is lower than the current PE for the US Specialty Retail industry at 18.7x.
• Analysts expect the number of shares outstanding to decline by 3.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

CarMax Future Earnings Per Share Growth

Risks

• CarMax reported a decline in wholesale gross profit per unit, which can raise concerns about maintaining or growing gross margins if this trend continues.
  
• The competitive pressure in the vehicle sourcing arena, especially with significant gains in dealer-sourced inventory, introduces risks to inventory acquisition costs, and could potentially compress gross profit margins.
  
• As the company expands its full credit spectrum lending, CarMax faces potential increased provisioning for loan losses. This could affect its net interest margins and overall profitability if not managed effectively.
  
• Macroeconomic factors such as potential tariffs and rising new car prices could lead to volatility in car prices and parts costs. This poses a risk to cost of goods sold and could pressurize service margins.
  
• The decision to withdraw specific timelines for long-term goals due to macroeconomic uncertainty might indicate challenges in maintaining growth momentum, which could impact revenue and earnings visibility.

Valuation

• The analysts have a consensus price target of $81.438 for CarMax based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $52.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $29.8 billion, earnings will come to $919.9 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 12.3%.
• Given the current share price of $61.38, the analyst price target of $81.44 is 24.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.