Oppenheimer Upgrades CarMax, Says Used Car Sales, Tax Savings Support Bullish Move

Analysts at Oppenheimer assumed a "cautious" stance on CarMax, Inc KMX in October, but three months later the firm is upgrading the stock. 

The Analyst

Oppenheimer's Brian Nagel upgraded CarMax's stock rating from Perform to Outperform with a price target boosted from $80 to $88.

The Thesis

A Perform rating was justified in October based on concerns of weakness in used car sales that could negatively impact CarMax's stock multiple, Nagel said in the upgrade note. (See the analyst's track record here.) 

While the company is not yet "out of the woods," there are sufficient reasons to support a bullish stance, the analyst said.

CarMax's stock has lost around 8 percent since early October, which makes it a meaningful underperformer versus the S&P 500 index, he said. Shares are now trading at a P/E multiple relative to the S&P 500 of less than 0.90x, which represents a level that is consistent with a multiyear trough that was achieved in early-2016, according to Oppenheimer. 

The pace of the Street's downward revisions to CarMax's used car sales estimates is encouraging given a backdrop that's "solid, if not improving," the analyst said. For instance, the spike seen in used vehicle prices after hurricanes Harvey and Irma is now waning, which suggests a better market supply of late model pre-owned vehicles.

CarMax and its shareholders are likely to be "outsized beneficiaries" of the tax bill, Nagel said. The entirely domestic nature of the business implies that CarMax has one of the highest tax rates in the retail space and could use part of the savings to fund a "more stepped-up" share buyback program, he said. 

Price Action

Shares of CarMax were trading higher by 1.17 percent at $70.65 at the time of publication. 

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Photo courtesy of CarMax.