Carmax Inc: Holding Pattern: Reit. EW, PT to $44

Research evidence excerpt

Carmax Inc: Holding Pattern: Reit. EW, PT to $44

supporting e = Morgan Stanley Research estimates

the structural bear thesis apart from fluctuating market sentiment on consumer or a

potential decel in unit data. From our perspective, while earnings were better this

quarter, the onus is on CarMax to provide greater detail on their growth algorithm –

what's different this time in their return to sustainable, profitable growth, and how

they plan to position their business in the evolving used car landscape – while also

providing greater transparency in regularly communicating key metrics for investors

to track progress towards those goals. We expect continued volatility in the stock as

it reacts to intraquarter data releases, used car macro, rate cut expectations, and

consumer confidence over the coming months.

We reit. our Equal-weight rating and raise our PT to $44 from $35 previously on

the 1Q earnings beat (30% higher vs. cons and MSe) and modest EPS revision

higher for 2Q-4Q27. We've seen significant volatility in the stock following earnings,

but we remain on the sidelines at Equal-weight and see a negative risk reward skew

($30 bear case, $70 bull case) and an implied 16.4x multiple (near 25th percentile of

historical multiple), reflecting the strategic uncertainty in the model ahead of the

company's Fall update. Longer-term, we see downside to earnings estimates relative

to consensus expectations through this transition period. In our view, GPU will need

to compress towards the low-$2,000 level and SG&A will need to remain elevated Morgan Stanley does and seeks to do business with

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