Rod Lache Lays Out The Tactical Reason To Stop Buying CarMax Shares

CarMax, Inc KMX is struggling in November as it dropped around 7 percent during the month.

The Analyst

Deutsche Bank's Rod Lache downgraded the stock from Buy to Hold and he also decreased its price target from $84 to $76.

The Thesis

Deutsche Bank upgraded CarMax Oct. 23, 2016 based on a forecast of significant same-store sales growth as decreasing used vehicle prices made used cars more affordable than the new ones. It seems the thesis played out in the last 12 months, but Lache now sees more balanced risk/reward and therefore he wants to tactically reduce his recommendation.

The stock is trading at the low end of the historical 18 times-22 times forward earnings range. There is no specific cause for concern, but it seems that the comparison of used cars price versus new cars price is going to be somewhat challenged going forward, said Lache. He expects a higher hurdle rate for achieving operating leverage as CarMax increases investment in digital capabilities.

The Price Action

CarMax opened Friday 2.68 percent lower and it managed to regain some ground after the opening. It's now trading around 1.4 percent lower and it pulled back around 12 percent from its 52-week high.

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Downshifting CarMax To A Perform Rating, Analyst Sees Continuing Sales Momentum In Question