Moz Farooque ACCA
This article first appeared on GuruFocus.
CarMax (NYSE:KMX) is getting a major Wall Street vote of confidence after Bank of America upgraded the used-car retailer to Buy from Underperform and raised its price target to $65 from $50.
The new target implies roughly 25% to 30% upside from where shares were trading around the time of the call. CarMax stock rose more than 3% in premarket trading Thursday following the upgrade.
The bullish turn centers on something surprisingly simple: price transparency.
Bank of America analysts Alexander Perry and Jack Joyce said CarMax has become the most price-competitive it has been in years as tighter Federal Trade Commission enforcement forces rival used-car dealers to advertise more complete, all-in vehicle prices rather than relying on lower headline prices that exclude certain fees.
That matters because CarMax has long operated with relatively transparent pricing.
As competitors are pushed toward similar disclosure standards, BofA believes some of CarMax’s apparent pricing disadvantage is disappearing.
The operating numbers are already encouraging.
CarMax’s comparable used-vehicle sales increased roughly 13% in its fiscal second quarter, while the broader industry declined about 2%, according to the analysts. BofA believes the gap reflects both improved relative pricing and stronger customer perception.
The bank also sees a longer runway for gains as more dealers comply with the new pricing environment and consumers become increasingly focused on the full cost of buying a used vehicle.
Investor Takeaway
I think the most interesting part of BofA’s upgrade is that it is not relying on a dramatic rebound in the used-car market.
It is arguing that the rules of competition are becoming more favorable for CarMax.
If competing dealers can no longer make vehicles appear cheaper by leaving fees out of advertised prices, CarMax’s longstanding no-haggle and transparent-pricing model becomes easier for consumers to compare directly.
That could support market-share gains even if the overall used-car backdrop remains challenging.
For investors, the key things to watch are comparable used-unit sales, gross profit per vehicle, market-share trends and whether the FTC-driven pricing advantage persists beyond the initial compliance period.
CarMax will also host a strategic update on Nov. 3, giving investors another opportunity to see whether management believes the recent sales momentum can translate into durable earnings growth.
