CarMax, Inc.Key arguments in support of the idea.
Q1 results have room to surprise on the upside, supported by the rebound in U.S. used car prices.
KMX is trading below its historical valuation averages.
Investment Thesis
CarMax, Inc. (KMX) is the largest used car retailer in the U.S., with 789,000 vehicles sold in the 2025 fiscal year alone. KMX runs two primary segments: the sale and servicing of used cars, offered both online and in-store, and a financing arm that provides customers with credit options for vehicle purchases. CarMax, Inc. is one of the top three largest auto dealerships by market cap and a prominent player in the S&P 500 index.
U.S. auto prices are revving back into growth mode after the rollout of industry duties, potentially turbocharging KMX's revenue volumes. Used car prices in the U.S. saw a sharp rebound in April. The Manheim Used Vehicle Value Index jumped 2.7% month-over-month and 4.9% year-over-year to 208.2 — the highest reading since October 2023. We attribute the price surge primarily to industry-wide tariff restrictions that took effect on April 3. A 25% tariff on imported vehicles has now been in place for nearly two months, while additional duties on imported auto parts have been in effect for over three weeks. While U.S. automakers were granted some relief on parts imports, finished vehicle imports continue to face the full brunt of the new tariffs. Tariffs could tighten the supply of new vehicles, pushing their prices higher and potentially driving increased demand for used cars. CarMax's revenue shows a strong correlation with wholesale prices of used vehicles, as reflected by the Manheim Index. Consensus forecasts predict a 6.3% year-over-year revenue growth for Q1 of fiscal 2026, reaching $7.56 billion. However, we believe the actual result could come in at $7.70 billion, reflecting a more robust 8.3% year-over-year increase.
Higher sales volumes could drive stronger net profit growth through operational leverage. The company has consistently maintained a gross margin of 10%-11% in recent years, while its operating expenses have been more stable and less impacted by changes in sales volume. In the past two years, as CarMax’s revenue has dropped due to falling used car prices, the fixed nature of its operating expenses has weighed on its net profit. This year, we may see a reversal of that trend. With revenue and sales volumes on the rise, KMX's net profit could accelerate at a faster pace. Consensus estimates forecast CarMax's net profit for Q1 of fiscal 2026 to reach $190 million, marking a 25% year-over-year increase. We also believe there is a strong chance that the company’s net profit may exceed consensus expectations.
KMX’s valuation remains below its historical average. CarMax's average P/E multiple over the past decade has been 20x, compared to its current forward P/E of 18x. Since 2023, KMX shares have traded within a stable range of $60 to $88, and currently, the stock is positioned closer to the lower end of this range.
CarMax, Inc. shares might be gearing up for a bullish run in the near term, fueled by anticipated robust first-quarter results for fiscal 2026, expected to be released around July.
Our price target for KMX shares over the next two months is pegged at $77, with a "Buy" recommendation. To manage potential downside risks, we advise setting a stop loss at $59.90.
