Carmax Inc. (KMX) Annual Valuation – 2014
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 5 Undervalued Companies for the Defensive Investor. 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 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 and its operations are conducted through its subsidiaries. CarMax also wholesales used vehicles. The Company is a retailer of used cars, based on the 408,080 used vehicles it retailed during the fiscal year ended February 29, 2012 (fiscal 2012). As of February 29, 2012, it operated 108 used car superstores in 53 metropolitan markets. In addition, it is a wholesale vehicle auction operator. It sold 316,649 wholesale vehicles through its on-site auctions in fiscal 2012. As of February 29, 2012, the Company conducted weekly or bi-weekly auctions at 52 of its 108 used car superstores. In addition, it sells new vehicles at four locations under franchise agreements with three new car manufacturers. In fiscal 2012, new vehicles comprised only 2% of its total retail vehicle unit sales.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| Recent Price | $44.49 |
| MG Value | $73.56 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $27.70 |
| Value Based on 0% Growth | $16.24 |
| Market Implied Growth Rate | 7.39% |
| Net Current Asset Value (NCAV) | -$24.44 |
| PEmg | 23.29 |
| Current Ratio | 3.42 |
| PB Ratio | 3.02 |
Balance Sheet – 11/30/2013
| Current Assets | $2,558,800,000 |
| Current Liabilities | $748,600,000 |
| Total Debt | $7,076,300,000 |
| Total Assets | $11,303,900,000 |
| Intangible Assets | $0 |
| Total Liabilities | $8,015,500,000 |
| Outstanding Shares | 223,230,000 |
Earnings Per Share
| 2014 | $2.24 |
| 2013 | $1.87 |
| 2012 | $1.79 |
| 2011 | $1.67 |
| 2010 | $1.27 |
| 2009 | $0.27 |
| 2008 | $0.83 |
| 2007 | $0.92 |
| 2006 | $0.70 |
| 2005 | $0.53 |
| 2004 | $0.55 |
Earnings Per Share – ModernGraham
| 2014 | $1.91 |
| 2013 | $1.62 |
| 2012 | $1.39 |
| 2011 | $1.12 |
| 2010 | $0.83 |
| 2009 | $0.62 |
Conclusion:
Carmax Inc. does not qualify for either the Defensive Investor or the Enterprising Investor.  The company’s lack of dividend payments and high PEmg and PB ratios are determining factors for the Defensive Investor.  The Enterprising Investor is concerned with the high level of debt relative to the current assets and the lack of dividend payments as well.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of 5 Outstanding Dow Components and 5 Low PEmg Companies for the Enterprising Investor.  From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.83 in 2010 to $1.91 in 2014.  This solid level of demonstrated growth outpaces the market’s implied estimate of 7.39% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Carmax Inc. (KMX)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Carmax Inc. (KMX) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.
