Down 40% This Year, Is CarMax Stock A Buy?
CarMax (NYSE:KMX) stock has declined by 23% over the last five trading days, falling to levels of about $44 per share. The stock also remains down by over 40% year-to-date. At these levels, the stock looks somewhat inexpensive, trading at just about 13x trailing earnings and 0.3x sales, well below the S&P 500. Moreover, KMX remains a solid business, with a large national store network and a growing digital footprint giving it network effects that smaller competitors just can’t match. The key question is whether the stock is cheap enough to be a buy. The answer, however, is not very convincing.
But no matter how attractive, investing in a single stock carries high risk. The Trefis High Quality Portfolio is designed to reduce stock-specific risk while giving upside exposure.
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The sharp sell-off follows a weaker-than-expected set of Q2 FY’26 results (Feb. fiscal year), as well as relatively cautious commentary from management on demand outlook. Revenues over the last quarter declined 6% year-over-year to $6.59 billion, while earnings fell to $0.64 per share, down from $0.85 a year ago. The company’s financing arm is also coming under some pressure, with income down 11% to $103 million, while provisions for loan losses jumped to $142 million from $113 million last year. On the retail front, comparable store used-vehicle sales dropped 6% year-over-year, hurt by cautious consumer spending as well as elevated borrowing costs, which have impacted the broader used vehicle market. Moreover, a pull-ahead in sales earlier this year – likely driven by tariff-related fear-buying also likely compounded the slowdown over the quarter.
Weak Fundamentals
The fundamental picture doesn’t look too good for CarMax (KMX). Over the past three years, revenues have contracted at an average rate of -7.4%, in sharp contrast to the S&P 500’s 5.3% growth. Even in the latest twelve months, CarMax’s revenue barely rose 1.8%, while the broader S&P 500 constituents grew 5.1%. Profitability also lags considerably, with an operating loss of $234 million over the past year, translating to a -0.9% margin versus the S&P’s 18.6% operating margin. Financial stability is a concern too: CarMax carries $19 billion in debt against a $6.7 billion market cap. This gives the company a high debt-to-equity ratio of 286%. Liquidity is thin as well, with just 2% of assets help as cash. Downturn resilience isn’t strong, either. KMX has underperformed the broader market during downturns, both in terms of depth of decline and speed of recovery, signaling weak resilience. Read KMX Dip Buyer Analyses to see how the stock has recovered from sharp dips in the past.
Overall, while the company faces vulnerabilities on multiple fronts, there are potential positives. Macroeconomic improvements, such as expected interest rate cuts – with projections indicating two additional quarter-point reductions by the end of 2025 and another in 2026 – could benefit sectors like the used car market. Additionally, KMX’s focus on aggressive cost management in areas such as logistics and vehicle reconditioning could help bolster profitability.
The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – S&P 500, Russell, and S&P midcap —and has achieved returns exceeding 91% since its inception. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
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