Company Profile (excerpt from Reuters): CarMax, Inc. (CarMax), incorporated on October 4, 1996, 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. It offers customers a range of makes and models of used vehicles, including both domestic and imported vehicles. It provides condition disclosures on each vehicle, including those for vehicles with major mechanical issues, possible frame or flood damage, branded titles, salvage history and unknown true mileage. It performs routine mechanical and minor body repairs in-house; however, for some reconditioning services, including but not limited to services related to manufacturer’s warranties, it engages third parties specializing in those services. The Company offers financing alternatives for retail customers across a range of the credit spectrum through CAF and arrangements with several financial institutions.
Downloadable PDF version of this valuation:
ModernGraham Valuation of KMX – April 2018
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 | $11,315,656,364 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 2.61 | 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 | 130.43% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 17.77 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 3.44 | 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 | 2.61 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 6.50 | 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 | $3.52 |
| MG Growth Estimate | 8.91% |
| MG Value | $92.72 |
| Opinion | Undervalued |
| MG Grade | C- |
| MG Value based on 3% Growth | $51.06 |
| MG Value based on 0% Growth | $29.93 |
| Market Implied Growth Rate | 4.63% |
| Current Price | $62.57 |
| % of Intrinsic Value | 67.49% |
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 PB ratio. 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 $2.21 in 2015 to an estimated $3.52 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.63% 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 $40.6. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 17.77, which was below the industry average of 17.88, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-60.95.
CarMax, Inc receives an average overall rating in the ModernGraham grading system, scoring a C-.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$60.95 |
| Graham Number | $40.60 |
| PEmg | 17.77 |
| Current Ratio | 2.61 |
| PB Ratio | 3.44 |
| Current Dividend | $0.00 |
| Dividend Yield | 0.00% |
| Number of Consecutive Years of Dividend Growth | 0 |
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| ModernGraham tagged articles | Morningstar |
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| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | 2/1/2018 |
| Total Current Assets | $3,061,444,000 |
| Total Current Liabilities | $1,174,058,000 |
| Long-Term Debt | $12,262,443,000 |
| Total Assets | $17,486,272,000 |
| Intangible Assets | $0 |
| Total Liabilities | $14,169,423,000 |
| Shares Outstanding (Diluted Average) | 182,239,000 |
Earnings Per Share History
| EPS History | |
| Next Fiscal Year Estimate | $3.97 |
| Feb2018 | $3.60 |
| Feb2017 | $3.26 |
| 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 |
Earnings Per Share – ModernGraham History
| EPSmg History | |
| Next Fiscal Year Estimate | $3.52 |
| Feb2018 | $3.18 |
| Feb2017 | $2.85 |
| 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 |
Recommended Reading:
Other ModernGraham posts about the company
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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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