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Carmax Inc Valuation – August 2016 $KMX

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – July 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Carmax Inc (KMX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): CarMax, Inc. (CarMax) is a holding company. The Company is a retailer of used vehicles. The Company operates through two segments: CarMax Sales Operations and CarMax Auto Finance (CAF). The Company’s CarMax Sales Operations segment consists of all aspects of its auto merchandising and service operations, excluding financing provided by CAF. The Company’s CAF segment consists of its own finance operation that provides vehicle financing through CarMax stores. The Company operates approximately 160 used car stores in over 70 metropolitan markets. The Company’s products and services include retail merchandising, wholesale auctions, extended protection plans (EPPs), reconditioning and service, and customer credit. The Company’s CarMax Sales Operations segment sells used vehicles, purchases used vehicles from customers and other sources, sells related products and services, and arranges financing options for customers. CAF operates in the auto finance sector of the consumer finance market.

KMX Chart

KMX data by YCharts

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Downloadable PDF version of this valuation:

ModernGraham Valuation of KMX – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $11,418,183,602 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.23 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 275.00% Pass
6. Moderate PEmg Ratio PEmg < 20 21.20 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.90 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.23 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 7.57 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

KMX value chart August 2016

EPSmg $2.80
MG Growth Estimate 10.95%
MG Value $85.01
Opinion Undervalued
MG Grade D+
MG Value based on 3% Growth $40.55
MG Value based on 0% Growth $23.77
Market Implied Growth Rate 6.35%
Current Price $59.30
% of Intrinsic Value 69.76%

CarMax, Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $1.62 in 2013 to an estimated $2.8 for 2017. This level of demonstrated earnings growth outpaces the market’s implied estimate of 6.35% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into CarMax, Inc revealed the company was trading above its Graham Number of $32.76. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 21.2, which was above the industry average of 17.79. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-48.15.

CarMax, Inc scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

KMX charts August 2016

Net Current Asset Value (NCAV) -$48.15
Graham Number $32.76
PEmg 21.20
Current Ratio 2.23
PB Ratio 3.90
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Useful Links:

ModernGraham tagged articles Morningstar
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Most Recent Balance Sheet Figures

Balance Sheet Information 5/1/2016
Total Current Assets $2,416,580,000
Total Current Liabilities $1,083,374,000
Long-Term Debt $10,091,457,000
Total Assets $14,789,927,000
Intangible Assets $0
Total Liabilities $11,817,642,000
Shares Outstanding (Diluted Average) 195,253,000

Earnings Per Share History

Next Fiscal Year Estimate $3.09
Feb2016 $3.03
Feb2015 $2.73
Feb2014 $2.16
Feb2013 $1.87
Feb2012 $1.79
Feb2011 $1.65
Feb2010 $1.26
Feb2009 $0.27
Feb2008 $0.83
Feb2007 $0.92
Feb2006 $0.63
Feb2005 $0.48
Feb2004 $0.55
Feb2003 $0.46
Feb2002 $0.44
Feb2001 $0.23
Feb2000 $0.01
Feb1999 -$0.12
Feb1998 -$0.18
Feb1997 -$0.01

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.80
Feb2016 $2.54
Feb2015 $2.21
Feb2014 $1.88
Feb2013 $1.62
Feb2012 $1.38
Feb2011 $1.11
Feb2010 $0.82
Feb2009 $0.61
Feb2008 $0.75
Feb2007 $0.67
Feb2006 $0.54
Feb2005 $0.47
Feb2004 $0.42
Feb2003 $0.31
Feb2002 $0.18
Feb2001 $0.03

Recommended Reading:

Other ModernGraham posts about the company

CarMax Inc. Annual Valuation – 2015 $KMX
16 Companies in the Spotlight this Week – 4/19/14
Carmax Inc. (KMX) Annual Valuation – 2014

Other ModernGraham posts about related companies

BorgWarner Inc Valuation – August 2016 $BWA
Ford Motor Company Valuation – August 2016 $F
O’Reilly Automotive Inc Valuation – July 2016 $ORLY
Genuine Parts Co Valuation – July 2016 $GPC
Johnson Controls Inc Valuation – July 2016 $JCI
Goodyear Tire & Rubber Co Valuation – July 2016 $GT
Harley-Davidson Inc Valuation – June 2016 $HOG
Autozone Inc Valuation – June 2016 $AZO
BorgWarner Inc Valuation – February 2016 Update $BWA
Genuine Parts Co Valuation – January 2016 Update $GPC

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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