Morningstar Equity Analysts have reiterated a "Buy" call for CarMax Inc (KMX), with a fair value estimate of $123 per share, reflecting significant upside potential from its last closing price of $81.42 (as of December 18, 2024). The company’s robust operational model, combined with its strategic focus on digital transformation and cost efficiencies, positions it strongly in the highly fragmented used-vehicle market.

CarMax’s Current Market Performance

Current Price and Valuation: CarMax’s last trading price was $81.42, translating to a Price-to-Fair Value ratio of 0.66, which indicates the stock is significantly undervalued compared to its intrinsic value.
Market Capitalization: The company’s market cap stands at $13.06 billion, underlining its position as the largest used-vehicle retailer in the United States.
Narrow Economic Moat: Analysts classify CarMax’s competitive advantage as a narrow moat, primarily due to its unique no-haggle pricing model, extensive data capabilities, and omnichannel strategy.

Key Drivers of Growth

Resilient Business Strategy:

Revenue Growth: Since 2000, CarMax’s revenue has grown at a compound annual growth rate (CAGR) of 11.3%, supported by consumer-centric practices and robust technological integration.
Retail Innovations: Nearly 60% of retail units sold are now via CarMax’s omnichannel platform, reflecting its ability to adapt to changing consumer preferences.
Operational Cost Management: Overhead expenses as a percentage of gross profit dropped by 640 basis points in Q3 FY2025, showcasing effective cost control measures.
Strong Performance in Retail Metrics:

EPS Growth: Diluted earnings per share (EPS) grew 55.8% YoY in Q3 FY2025, surpassing consensus estimates.
Comparable Store Growth: For the first time since 2023, comparable store retail revenue rose 0.5%, driven by an uptick in unit volumes and better affordability for used vehicles.
Technological Edge:

The integration of automated customer interaction tools for online shoppers has enhanced consumer convenience while keeping labor costs in check. This technological advantage underpins CarMax’s ability to maintain its leadership in the sector.

Strategic Focus Areas

Inventory Sourcing: A self-sufficiency ratio of over 70%, where most vehicles retailed are sourced directly from consumers, enhances gross profit margins.
Omnichannel Expansion: CarMax’s ability to blend in-store and online experiences ensures flexibility for customers while reducing the need for extensive brick-and-mortar investments.
Finance Arm Advantage: The CarMax Auto Finance (CAF) division finances 43% of unit sales, contributing significantly to profitability while mitigating external borrowing needs.

Competitor Landscape

CarMax faces competition from major players like:

Asbury Automotive Group: Offers a fair value estimate of $295, currently trading at a discount.
AutoNation Inc: Positioned with a fair value of $192, showing parallels with CarMax’s omnichannel growth efforts.
However, CarMax’s early adoption of data-driven operations and consumer-friendly practices provides it with a competitive edge.

Technical Analysis and Investment Targets

Fibonacci Levels for KMX:

Resistance Levels: $88.22, $99.83
Support Levels: $75.00, $65.83
Investor Targets:

Short-term target: $95
Long-term target: $123, aligning with the fair value estimate.

Risks and Challenges

Cyclical Nature of the Industry: The auto retail industry remains highly sensitive to economic downturns, which could impact CarMax’s revenues.
Affordability Issues: Persistently high interest rates and elevated vehicle prices are headwinds, although gradual improvements are expected.
Competitive Pressures: Franchised dealers and online-only competitors like Carvana continue to pose a threat, though CarMax’s scale and experience mitigate these risks.