CarMax stock was handed another in a string of downgrades Wednesday as analysts expect continued pain in the used car market throughout 2023. A key industry metric showed used car prices took a record fall in December.
JPMorgan analyst Rajat Gupta downgraded CarMax stock to "underweight" from "neutral" Wednesday. That analyst maintained a price target of 60, about 10% below where shares opened Wednesday. Gupta told investors that despite the recent rebound of CarMax stock, the used car market giant has quite a bit of downside risk.
CarMax stock advanced about 0.13% Wednesday during market trade. On Tuesday shares advanced nearly 0.5% to 67.39. CarMax stock has had a solid start to 2023 and is up more than 10% so far in January.
Gupta wrote Wednesday that KMX metrics included a "deteriorating margin profile and low visibility on used car market (price) normalization next year."
Gupta added that the Richmond, Va.-based company is likely a long-term winner in the industry battle for market share. But its path to realizing that potential continues to get pushed further out.
CarMax Outlook 'Far From Clear'
The recent CarMax stock downgrade follows analyst skepticism in late December after the company's latest earnings report.
On Dec. 22, KMX stock fell after the used-car kingpin reported earnings below analyst targets. CarMax reported earnings of 24 cents per share, a drop of more than 85% from year-ago levels and far below the FactSet analysts target of 64 cents. Revenue dropped nearly 24% to $6.51 billion, undercutting views for $7.16 billion.
CarMax also reported it sold 20.8% fewer vehicles vs. year-ago levels, and reported same-store sales down 22.4%.
"We believe numbers are not only far from reset for FY24 but the trajectory to eventual normalization is also far from clear today and likely to underwhelm," Gupta wrote.
Last Thursday, Argus analyst Taylor Conrad also downgraded CarMax to "hold" from "buy." Conrad wrote that used auto retailers will struggle in the near term as inventories decline.
CarMax Stock And Used Car Prices
Following CarMax earnings in December, Morgan Stanley analyst Adam Jonas on Dec. 28 lowered the firm's price target to 75, down from 90, but maintained an "overweight" rating on KMX shares.
Prices for used cars at the auction/wholesale level began dropping early in 2022, according to the Manheim Used Vehicle Index. A five-year slide in new car inventories bottomed in February 2022, and then inventories reversed and climbed higher in March through September.
Historically low new car inventories, especially since Covid pandemic economic issues snarled industry supply chains, played a key role in driving used car prices to record levels.
In May, used car market disrupter Carvana announced it would lay off 12% of its workforce, and take on higher cost debt.
The Manheim Used Vehicle Value Index in December increased 0.8% in wholesale auto prices month over month. However, prices dropped 14.9% year over year, the largest annualized price decline in the 26-year history of the index.
Along with CarMax stock, other industry group stocks, including Penske Auto Group, Lithia Motors, AutoNation and Asbury Auto Group all made gains Wednesday.
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