JPMorgan downgrades CarMax, saying 'sticker shock' will continue to hurt sales

Published Wed, Apr 13 20228:50 AM EDT

Vehicle prices are getting out of hand for some consumers, and that could hurt CarMax in the near term, according to JPMorgan. Analyst Rajat Gupta downgraded CarMax to neutral from overweight following its recent quarterly results, citing concerns about vehicle affordability which could put pressure on volumes over the next year. "While we had highlighted the potential for below consensus results, we were surprised by the magnitude ... driven by volume headwinds stemming from 'sticker shock' pricing impact coupled with macro factors including, consumer confidence, Omicron, vehicle affordability and lapping of stimulus benefits, at a time when investments in strategic initiatives, technology and other growth-related verticals (appraisals, customer experience centers) remain elevated," Gupta wrote. Shares of CarMax have fallen 28.3% this year and plummeted 9.5% on Tuesday after the used car retailer reported a quarterly profit that was below expectations. The move comes as car prices soar and volumes shrink amid ongoing supply chain issues, shortages and production delays — and JPMorgan thinks these conditions will only worsen before they improve. Amid these headwinds, CarMax's stock is likely approaching a near-term high and could fall about 20% from Tuesday's close price in the near future, Gupta said. "While shares have held up reasonably well vs online used peers over the last 6 months ... and we believe KMX has less relative downside in a mild near-term recession given better BS leverage as well as FCF support, we don't find it compelling to recommend this trade anymore given the material cut needed to near-term estimates in a likely worsening affordability backdrop before it gets better," Gupta wrote. Gupta also thinks the car retailer's auto financing business, which saw quarterly income grow 3% year-over-year, will struggle as consumers shift toward alternate finance providers offering more flexibility and a downturn in the business could impact future earnings. JPMorgan lowered its price target on CarMax to $110 from $130, which offers a near 18% upside from Tuesday's close price. The bank also adjusted earnings estimates for 2023 to $5.25 per share and lowered forecasts for 2024, 2025 and 2026.

An employee places a pending sale sticker on a used Pontiac GTO vehicle outside of a CarMax Inc. dealership in Burbank, California, U.S., on Tuesday, June 17, 2014.

Patrick T. Fallon | Bloomberg | Getty Images

Vehicle prices are getting out of hand for some consumers, and that could hurt CarMax in the near term, according to JPMorgan.