CarMax, Inc. (KMX): what the price assumes

Generated: 2026-07-29 · Exported: 2026-08-01 · Source: https://boothcheck.com/report/KMX

Headline

Field	Value
Ticker	KMX
Company	CarMax, Inc.
Current price	$60.39/sh
Composition	Used vehicle sales 80% / Wholesale vehicle sales 17% / Extended protection plan revenues 2% / Third-party finance fees, net 0% / Advertising & subscription revenues 1% / Service revenues 0% / Other 0%

What The Price Assumes (Inversion)

The assumption today's price embeds, recovered by inverting the valuation.

Field	Value
Inversion basis	whole-company
Operating margin (value-band context)	2.7%
Operating margin (mid-cycle)	4.9%
Margin compression (value-band)	-2.2pp
Trailing margin (depressed year)	1.4%
Implied growth	1.0%
Multiple paid	21x mid-cycle operating income

The operating-margin figure is value-band context at year 12: derived from the framework's value band, a separate calculation — not part of the priced-in solve.

Solve inputs: computed at a 7% cost of capital with 4% terminal growth over a 5-year stage; each 1pp of cost of capital moves the implied operating-profit growth ~8.2pp (computed at the 7% minimum rate; the CAPM rate 4.2% sits below it).

Reconcile: at the x-ray's 9.3% required return this reads ~17.6%/yr; the models below use their own rates.

How unusual the bet is: within-range (limited comparison data)

Reference	Value
vs own history	-0.18σ
implied end-window share	0%

Valuation X-Ray

The price is justified by relative-multiple and growth-DCF; asset-based/earnings-power land below the price.

How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.

Family	Median price/FV	Models	Reads
Asset	4.65x	4	expensive
Earnings	3.47x	1	expensive
Relative	0.84x	2	justifies
Growth	0.65x	3	justifies

Families that justify the price: Relative, Growth Families that call it expensive: Asset, Earnings

The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 3.0%); the inversion above states its own rate.

Per-Model Detail (n=10)

Model	Family	FV	Price/FV	Applicable	Methodology
DCF Perpetual Growth	Growth	$145.58	0.41x	yes	FCF base $1.0B, growth -2% (input: historical growth), terminal g 0.5%, WACC 3.0%, 5yr projection
DCF Exit Multiple	Growth	$93.22	0.65x	yes	Exit EV/EBITDA: 73.5x / 75.5x / 77.5x (bear / base = today's held flat / bull), 5yr
Relative Valuation	Relative	$41.17	1.47x	yes	P/E 25.57x (blended: static sector reference 20x + trailing (TTM) 39x), scenarios: 21.6x / 25.6x / 29.5x (bear / base = reference held flat / bull), EV/EBITDA 30.8x
Simple DDM	Growth	—	—	no	—
Two-Stage DDM	Growth	—	—	no	—
Simple Excess Return	Asset	$16.92	3.57x	yes	BV/sh $43.04, ROE (TTM) 3.6%, ke 9.3%
Two-Stage Excess Return	Asset	$10.53	5.74x	yes	5yr excess ROE then converge to ke=9.3%
Discounted Future Market Cap	Growth	$42.13	1.43x	yes	Rev $26.3B, growth -2% (input: historical growth; tapered), Terminal P/S: 0.3x / 0.3x / 0.4x (bear / base = today's held flat / bull, cap 8x)
Growth-Adjusted P/E	Relative	—	—	no	—
Margin Trajectory	Growth	—	—	no	—
Earnings Power Value	Earnings	—	—	no	—
Residual Income	Asset	$7.96	7.59x	yes	BV $43.04 + 5yr PV of (ROE (TTM) 3.6% − Kₑ 9.3%) × BV; BV grows 2.4%/yr
Graham Number	Asset	$39.49	1.53x	yes	√(22.5 × EPS $1.61 × BVPS $43.04) — Graham's conservative floor
EV/EBITDA Relative	Relative	$0.01	6039.00x	yes	EBITDA $0.36B × sector EV/EBITDA 14.0x (excluded from median)
FCF Yield	Earnings	$0.01	6039.00x	yes	FCF $994.3M / Kₑ 9.3% — zero-growth perpetuity (excluded from median)
SBC-Adj FCF Yield	Earnings	$0.01	6039.00x	yes	SBC-adj FCF $0.90B (FCF $0.99B − SBC $0.10B) capitalized at Kₑ (excluded from median)
Ben Graham Formula	Earnings	$1.35	44.73x	yes	EPS $1.61 × (8.5 + 2×-5.0%) × (4.4 / 5.3%) (excluded from median)
ROIC-Justified P/B	Asset	—	—	no	—
P/Sales Sector	Relative	$278.04	0.22x	yes	Revenue $26.35B × sector P/S 1.5x
PEG Fair Value	Relative	—	—	no	—
Earnings Yield	Earnings	$17.41	3.47x	yes	EPS $1.61 / required return 9.3% (Rf 4.3% + ERP 5.0%)
Funds From Operations Multiple	Relative	—	—	no	—
Clinical Phase NPV	Growth	—	—	no	—
Merton	Asset	—	—	no	—
V5 Mechanical	—	—	—	no	—

Solvency

Field	Value
Net debt	$18.2b
Net debt / NOPAT (after-tax)	17.89x
Net debt / operating income (pre-tax)	14.13x
Interest coverage	11.0x
Share count CAGR (buyback)	-3.2%
Burning cash	no

Leverage and coverage are computed on normalized mid-cycle operating income (mid-cycle margin 4.9%); the trailing year was depressed.

Bullet Takeaways

The number that decides CarMax is comparable-store used-unit sales, and in fiscal Q4 2026 it fell 1.9% while total used units dipped 0.8%. Volume, not price, is the swing factor, and volume is still soft.

At $53.62 the market pays about 29x company-wide operating income, implying roughly 9.5% annual operating growth for five years against trailing margins near 3%. The price assumes a profitability and volume recovery that has not yet shown up.

Most of the $18 billion of debt funds the CarMax Auto Finance loan book through securitization, not corporate operations, so the headline leverage overstates the balance-sheet risk. The real risk is a used-car cycle that keeps unit sales and gross profit per unit under pressure.

Bull Case

Anchor the thesis on one metric: comparable-store used-unit sales. For a used-car retailer, that single line captures whether the core business is taking share and turning inventory, and it is the number that, if it inflected sharply higher, would flip the verdict. Right now it is the swing factor working against the stock, comparable used units fell 1.9% in fiscal Q4 2026, but it is also the lever with the most upside if the used-car market normalizes. CarMax is the largest used-vehicle retailer in the country, and when affordability improves and trade-in volumes recover, the omnichannel platform it built, buy online, in store, or both, is positioned to convert that demand faster than a traditional dealer.

The profit architecture is more resilient than the unit softness suggests. CarMax makes money three ways: gross profit per vehicle, extended protection plans, and the CarMax Auto Finance arm. Even in a soft quarter, gross profit per retail used unit held at $2,115 and extended-protection-plan margin per retail unit was steady at $581. Management is deliberately trading some per-unit margin for volume, the GPU decline of $207 reflected pricing actions implemented to drive an improved sales trend, a sensible move from a leader optimizing the unit-versus-margin tradeoff. The company itself describes monitoring macroeconomic factors and pricing elasticity to optimize unit sales and profitability while keeping inventory competitively priced (FY2025 10-K, accession 0001170010-25-000024).

The finance arm is the underappreciated asset. CAF income is the interest and fee income on the auto loans CarMax originates, less the interest expense on the debt issued to fund those receivables and a loan-loss provision (FY2025 10-K). That is a captive, recurring profit stream that grows with units sold and compounds independently of the retail cycle. CarMax is also shrinking its share count about 3% a year through buybacks. Against franchised-dealer peers like AutoNation, Lithia, and Penske, CarMax offers the scale, brand, and financing flywheel of the category leader. If used-unit volume turns, the operating leverage on a 3% margin base is substantial, and that is the bull case.

Bear Case

The bear case is best seen as a qualitative disconnect: CarMax is priced like a growth compounder while operating like a cyclical retailer stuck in neutral. The observation comes before the ratio. Unit sales are flat to down, comparable used units fell 1.9% and retail used units fell 0.8% in fiscal Q4 2026, and the company is cutting gross profit per unit to chase even that flat volume. A business that has to give up margin to hold sales is not compounding; it is defending. Yet the market treats it as if a robust recovery is a near certainty. That gap between the priced-in story and the operating reality is the heart of the bear case.

Now the numbers that make the disconnect concrete. At $53.62 (June 27, 2026) the price embeds operating growth of about 9.5% per year for five years on a business whose trailing operating margin is under 3% and whose revenue actually declined year over year. The static methods that value CarMax on what it earns today land far below the price: earnings power value and FCF yield collapse toward zero on the thin normalized margins, simple excess return near $18, residual income near $10. Those are not all literal targets, but their distance from the price is the warning that the growth assumption is carrying the entire valuation. The reverse-DCF requires a sustained reacceleration that the recent unit trend does not support.

The macro variable with the most leverage is the used-car cycle itself, and it cuts at every line. Vehicle affordability, financing rates, and trade-in supply drive unit volume; rising rates pressure both the consumer's monthly payment and the cost of funding the CAF loan book; and a weaker consumer raises loan losses in the finance arm just as unit sales soften. The $18 billion of debt is mostly non-recourse securitization funding for those receivables rather than corporate leverage, which limits the solvency risk, but it also means CAF earnings are sensitive to credit performance and funding spreads. Pay 29x operating income for a flat-volume, thin-margin, rate-sensitive retailer and you are underwriting a used-car recovery on a specific timeline. If the cycle stays soft, the multiple has a long way to compress toward what the current fundamentals support.

Valuation

CarMax is a case where the headline numbers mislead and the structure matters. The reported leverage looks alarming, net debt near $18 billion at more than 20x operating income, but most of that debt is non-recourse securitization funding for the CarMax Auto Finance loan book, not corporate borrowing. CAF income is the interest and fee income on those receivables less the funding interest and loan-loss provision (FY2025 10-K, accession 0001170010-25-000024), so the debt and the receivables move together and the corporate balance sheet is far less stretched than the ratio suggests. That is why the model floors the discount rate and treats several methods as unreliable here.

With that caveat, the valuation is demanding. The reverse-DCF reads the price as embedding operating growth of about 9.5% per year for five years, computed at the 7% minimum cost of capital, against a trailing operating margin under 3% and declining revenue. The method families split accordingly: the relative and growth frames straddle the price, relative valuation near $39, the DCF exit multiple near $97, discounted future market cap near $38, while the asset and earnings-power frames land far below, simple excess return near $18, residual income near $10, and the FCF and EPV methods collapse to near zero because normalized margins are thin and the depressed-rate inputs make those denominators unstable.

The honest synthesis is that CarMax is priced for a clear cyclical recovery in both units and margins. On current, depressed fundamentals the stock looks expensive, with the base of the fair-value range well below the price; on a normalized through-the-cycle basis with units and gross profit recovering, the relative and growth methods can justify it. The investment question is timing and magnitude of the used-car upturn, not balance-sheet survival. The thin operating margin means small changes in unit volume and gross profit per unit swing earnings hard, so the wide valuation range is appropriate, and the burden of proof sits with the recovery thesis.

Catalysts

Fiscal Q4 2026 (ended February 28, 2026, reported April 2026) showed combined retail and wholesale unit sales of 303,969, up 0.7%, but with retail used units down 0.8% and comparable-store used units down 1.9%; wholesale units rose 3.0%. Gross profit per retail used unit was $2,115, down $207 on deliberate pricing actions to drive sales, while extended-protection-plan margin held at $581 per unit. The company bought 270,000 vehicles from consumers and dealers. The next quarterly comparable-used-unit figure is the single most important catalyst.

The metrics to watch are comparable-store used-unit sales as the demand tell, gross profit per unit to see whether the margin-for-volume trade is working, and CarMax Auto Finance income and loan-loss provisions as the credit read. A turn in comparable units back to growth without further GPU erosion would be the clearest validation of the recovery thesis.

The macro swing factors over the next 90 days are used-vehicle affordability and pricing, consumer financing rates, and trade-in supply, all of which drive unit volume, plus the funding cost and credit performance of the CAF loan book. Continued share buybacks against a roughly 3% annual reduction are the recurring capital-return signal.

Sources: BusinessWire and CarMax investor relations (Q4 FY2026 results), Nasdaq, SEC 8-K earnings releases, Finsee.

Peer Cohorts (Per Segment, With Filing Citations)

Core business (reported)

• CVNA (CARVANA CO.)
• FY2025 10-K: …and further investing in our patented vending machines. Competition With tens of thousands of automotive retailers in the U.S., the used car marketplace is a highly fragmented and highly competitive industry. We believe the primary competitive factors in this market include transparency, convenience, price,…
• FY2025 10-K: …included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K the "Ally MPSA"), and through fixed pool loan sales, with financing partners who generally acquire them at premium prices without recourse to us for their post-sale performance. Factors affecting revenue…
• AN (AUTONATION, INC.)
• FY2025 10-K: …vehicle brand, and generally need the manufacturer to approve any relocation or the grant of a new franchise. However, to the extent that a market has multiple dealers of a particular vehicle brand, as most of our key markets do with respect to most vehicle brands we sell, we face significant intra-brand competition.…
• FY2025 10-K: …to expand our footprint and increase scope and scale through both the acquisition of new dealerships and franchises. We face competition from 8 Table of C ontents (i) several public companies that operate numerous automotive retail stores or collision centers on a regional or national basis, including franchised…
• LAD (Lithia Motors, Inc.)
• FY2025 10-K: …provide for prior written notice before a franchise may be terminated under most circumstances. We also sign master framework agreements with most manufacturers that impose additional requirements. See Item 1A. Risk Factors. Competition The retail automotive business is highly competitive. Currently, there are nearly…
• FY2025 10-K: …other unallocated corporate overhead expenses. Internal charges consist of corporate expense allocations which increase segment income for "Corporate and Other" while decreasing segment income for the other operating segments. These internal corporate expense allocations are used to increase comparability of our…
• GPI (Group 1 Automotive, Inc)
• FY2025 10-K: …highest return opportunities. We evaluate all capital uses - including acquisitions, capital expenditures, share repurchases, dividends, debt reduction, real estate investments and organic growth - through a consistent return-based framework. Our acquisition strategy focuses on high-quality dealerships and brands in…
• FY2025 10-K: …as auto brokers, leasing companies and internet companies that provide referrals to, or broker vehicle sales with other dealerships or customers. Our principal new vehicle dealer competitors also have franchise agreements with the various vehicle manufacturers and, as such, generally have access to new vehicles on…
• PAG (Penske Automotive Group, Inc.)
• FY2025 10-K: I, Item 1 for a discussion of our outlook in our markets. Operating Overview Automotive and commercial truck dealerships represent 97.1% of our revenue and 80.9% of our earnings before taxes during 2025. Income from our PTS investment represents 15.3% of our earnings before taxes during 2025. New and used vehicle…
• FY2025 10-K: …terms as us. Automotive dealers also face competition in the sale of new vehicles from purchasing services, and electric vehicle manufacturers that sell directly to consumers. With respect to arranging financing for our customers' vehicle purchases, we compete with a broad range of financial institutions, such as…
• ABG (ASBURY AUTOMOTIVE GROUP, INC.)
• FY2025 10-K: …in automobile sales and services may have a material adverse effect on our results of operations. The automotive retail and service industry is highly competitive with respect to price, service, location, and selection. Our competition includes: (i) franchised automobile dealerships in our markets that sell the same…
• FY2025 10-K: …the same or an affiliated landlord under a cross-default provision, (ii) eviction from the premises; and (iii) the landlord having a claim for various damages. 20. SEGMENT INFORMATION As of December 31, 2025, the Company had two reportable segments: (1) Dealerships and (2) TCA. Our dealership operations are organized…
• SAH (SONIC AUTOMOTIVE, INC.)
• FY2025 10-K: …and related businesses. Automotive retailing is a highly competitive business. Our competitors include publicly and privately owned dealerships, some of which are larger and have greater financial and marketing resources than we do. Many of our competitors sell the same or similar makes and models of new and used…
• FY2025 10-K: …In general, these statutes make it unlawful for a manufacturer or distributor to compete with a new motor vehicle dealer in the same brand operating under an agreement or franchise from the manufacturer or distributor in the relevant market area. Certain states, including Florida, Georgia, North Carolina, South…
• OPLN (OPENLANE, Inc.)
• FY2025 10-K: …advantage could be threatened and our business and results of operations could be adversely impacted. We face significant competition for the supply of used vehicles, the buyers of those vehicles and the floorplan financing of these vehicles. Our principal sources of competition primarily come from: (i) large,…
• FY2025 10-K: …their operations. This segment structure reflects the financial information used by our CODM to make decisions regarding the business, including resource allocations and performance assessments. The Company's method for measuring profitability on a reportable segment basis is operating profit (loss). The CODM…

Methodology Note

• Priced-in inversion: the valuation is inverted on the current price to recover the operating-income growth, duration, and steady-state margin the price embeds (ROE for financials, FFO growth for REITs).
• Valuation x-ray: the valuation models, grouped into four families (asset, earnings, relative, growth). Each model is expressed as a price/FV ratio (distance from price), not a point fair-value estimate. The spread across families is the disagreement.
• Solvency: net cash/debt, net-debt-to-NOPAT, interest coverage, and share-count CAGR from EDGAR financials (net debt / FFO and fixed-charge coverage for REITs; regulatory-capital framing for financials).
• Peer cohorts: per-segment comparables with deep-linkable SEC filing citations.

Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.