CarMax Shares May Be Idling At An Attractive Entry Point

Despite challenging near-term comparisons, the valuation of CarMax, Inc KMX shares create an attractive risk-reward profile, according to one analyst.

The Analyst

Berenberg analyst Andrew Fung upgraded shares from Hold to Buy, but reiterated his $83 price target.

The Thesis

CarMax's opportunity for outperformance is sustainable, while it has the tools and resources to effectively lock horns with new entrants, Fung said in a Monday note. Fung believes the company will deliver double-digit earnings growth through the mid-term.

Additionally, CarMax, being a used-vehicle pure-play, stands to benefit from investors rotating money out of automakers, stung by moderating new vehicle sales.

Berenberg sees the deceleration CarMax experienced in the fiscal year 2018 third quarter as the result of temporary headwinds, and not as a fundamental change in its long-term potential. The company is continuing its outperformance, as evidenced by its 2.7 percent same store growth last quarter versus a single-digit decline for the industry, sustained strong web traffic growth and better conversion, Fung said.

Berenberg also sees significant room for additional growth. The firm said CarMax has the right approach with its omni-channel strategy, which integrates a strong digital experience.

"Longer term, our analysis suggests that KMX has opportunities to achieve efficiencies that could bring its costs in-line with online retailers while KMX's stronger GPUs offer additional ability to profitably compete," the firm said.

Price Action

Shares of CarMax are up over 7 percent for the past year. At time of writing, shares were slipping 1.8 percent to $69.76.

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