The Bar Is Low For CarMax's Q2 Earnings

• Expectations for CarMax’s upcoming Q2 earnings report are relatively low
• Despite a 17 percent decline in share price in recent months, data suggest the used car market remains strong
• Oppenheimer is bullish on CarMax ahead of earnings

Oppenheimer analyst Brian Nagel believes that the market’s expectations for CarMax Inc KMX’s Q2 are fairly low. In a new report, Nagel discusses why he believes the company’s earnings report on September 22 could be good enough to send its share price higher.

Low bar
Oppenheimer is looking for Q2 earnings of $0.73 versus consensus expectations of $0.76. For fiscal 2015, Oppenheimer is now calling for earnings of $3.01 versus consensus expectations of $3.05.

Solid market
With Oppenheimer’s earnings expectations below consensus, how is it that Nagel sees higher share prices? CarMax’s stock has majorly underperformed the S&P 500 lately. In fact, CarMax is down 17 percent since early April, while the S&P is down only about 4 percent during that time.

While CarMax’s shares have been falling, demand in the auto industry has remained solid.

“Recent commentary from leading U.S. auto dealers and auto OEMs implies retail demand for cars and trucks remained solid if not improved throughout the summer months,” Nagel explains. Oppenheimer typically gauges used car demand based on new car demand, which suggests a strong market.

Value
In addition to a strong business, the decline in CarMax’s share price has improved the stock’s valuation, and Nagel sees upside from current prices. Oppenheimer currently has an Outperform rating on CarMax and a $77 target for the stock. The target represents about 20x Oppenheimer’s fiscal 2017 EPS estimate for the company.
 

Disclosure: the author holds no position in the stocks mentioned.