Petr Huřťák
4 min read
What Happened?
Shares of used automotive vehicle retailer Carmax (NYSE:KMX) jumped 4% in the afternoon session after BofA Securities upgraded the stock to Buy from Underperform and raised its price target to $65 from $50. According to TheFly, the analyst said Federal Trade Commission enforcement of price transparency, together with CarMax’s own pricing work, has made the company the most price-competitive it has been in years. The firm sees the Nov. 3 strategy update as a near-term catalyst. According to Investing.com, analysts Alexander Perry and Jack Joyce tied the call to sustained comparable-sales growth. Used-unit comps rose 13% in the fiscal second quarter, against a 2% decline for the industry.
The FTC rule, in place since May, requires competing dealers to advertise all-in prices instead of prices that leave out fees, which is how CarMax already priced. CarMax attributes about half of the improvement in its price position to that enforcement, and the analysts expect a longer benefit as more dealers comply and repeat buyers respond. A BofA check of about 500 listings across six high-volume 2023 models put CarMax’s advertised prices 0.3% above the market average, compared with Carvana at 1.2% below and franchise dealers at 0.1% below. They also expect the Nov. 3 update to lay out cost cuts, including a centralized parts tool, a shorter 30-day warranty, and fewer transfers among the roughly 2 million to 2.5 million vehicles CarMax moves a year, so the comps can hold once the first wave of the pricing benefit fades.
After the initial pop, the shares cooled down to $51.75, up 3.9% from the previous close.
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What Is The Market Telling Us
CarMax’s shares are quite volatile and have had 16 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 1 day ago when the stock dropped 2.9% on the news that major indices pulled back and retail equities faced pressure as the Bureau of Labor Statistics reported a hotter-than-expected September inflation print, pushing Treasury yields higher. As detailed by the Bureau of Labor Statistics, the consumer price index rose 3.7% year-over-year in September, topping the 3.6% estimate from economists polled by Dow Jones. According to CNBC, core inflation—which excludes volatile food and energy costs—climbed 2.6% annually against expectations of 2.5%, largely bolstered by a 9.1% surge in gasoline costs and higher expenses for air travel. Following the print, CNBC market data showed the 10-year Treasury yield climbed over six basis points to 5.278%, while the 30-year yield advanced past 5.59%. According to market commentators, rising yields intensify pressure on equity valuations and consumer spending power just as third-quarter corporate earnings get underway. In remarks carried by CNBC, Franklin Templeton Institute head investment strategist Jeff Schulze noted that pressure across the long end of the curve acts as a valuation headwind for risk assets. Financial analysts explain that higher benchmark yields mechanically elevate the discount rate applied to corporate earnings, compressing the multiples investors are willing to pay for consumer discretionary and retail equities.
