CarMax Pulls Ahead Of Peers, But Keep An Eye On Auto Industry Credit Woes

Credit Risk Has Become Manageable Now

Analysts Seth Basham, James Mann and Nathan Friedman said there remains the risk of a self-reinforcing cycle of lower used car values, rising auto loan losses, tighter credit conditions and rising negative equity. These, according to the analysts, could crimp demand.

However, the analysts think the risk has become manageable now, as auto loan capital markets remain relatively healthy despite the rise in delinquency and loss rates for subprime auto lenders. The view that there are limited risk concerns for funding new batches of subprime auto loans is based on narrowing ABS index spreads versus benchmark rates.

"Indeed, we are encouraged by recent improvements in delinquency and loss rate trends for new vintages, and we are comfortable with our CAF estimates that do not significantly differ from consensus," the analysts said.

Outperforming The Industry

Wedbush noted that CarMax's comps have accelerated over the past four quarters to 8.7 percent in the fiscal year fourth quarter of 2016. Even as the used car industry growth has accelerated, the firm noted that CarMax outperformed the industry at an accelerating pace.

Pointing to the recent quarterly statistics, which revealed unit comps and gross profit comps outperforming the firm's dealer indexes, it said this strength can continue near term. The firm sees these as favorable indicators for CarMax shares, based on a strong correlation between comps and CarMax's relative stock price performance.

Wedbush sees less CAF credit losses this year, thanks to the improvement in newer loan vintages and the availability of credit at reasonable terms. Additionally, the company's tech investments should help it to continue to outperform the used car industry.

Raising Estimates, Rating And Price Target

"With credit concerns restrained, continued strength in KMX's core business leads us to boost our earnings estimates above consensus," the firm said.

As such, the firm upgraded the shares of CarMax to Outperform from Neutral and lifted its price target to $70 from $60.

At time of publication, CarMax shares were up 4.12 percent at $62.49.