CarMax Inc Valuation – November 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 Stocks for Using A Benjamin Graham Value Investing Strategy – August 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.
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Downloadable PDF version of this valuation:
moderngraham-valuation-of-kmx-november-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 | $11,320,488,206 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 2.54 | 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 | 276.69% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 20.70 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 3.68 | 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 | 2.54 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 6.41 | 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
| EPSmg | $2.81 |
| MG Growth Estimate | 11.07% |
| MG Value | $86.11 |
| Opinion | Undervalued |
| MG Grade | D+ |
| MG Value based on 3% Growth | $40.75 |
| MG Value based on 0% Growth | $23.89 |
| Market Implied Growth Rate | 6.10% |
| Current Price | $58.16 |
| % of Intrinsic Value | 67.54% |
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 $2.81 for 2017. This level of demonstrated earnings growth outpaces the market’s implied estimate of 6.09% 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 $33.6. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 20.68, which was above the industry average of 17.79. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-50.03.
CarMax, Inc scores quite poorly in the ModernGraham grading system, with an overall grade of D+.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$50.03 |
| Graham Number | $33.60 |
| PEmg | 20.68 |
| Current Ratio | 2.54 |
| PB Ratio | 3.67 |
| 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 |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | 8/1/2016 |
| Total Current Assets | $2,755,347,000 |
| Total Current Liabilities | $1,084,363,000 |
| Long-Term Debt | $10,703,373,000 |
| Total Assets | $15,504,332,000 |
| Intangible Assets | $0 |
| Total Liabilities | $12,441,987,000 |
| Shares Outstanding (Diluted Average) | 193,623,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $3.13 |
| 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 | $2.81 |
| 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
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.
