CarMax Could Be A Used Car Lot Value Buy (NYSE:KMX) | Seeking Alpha\n\nAug. 10, 2025 10:06 AM ET 358 Followers Follow * 5 Share * Save * (12min) Summary * Tariffs on new cars are driving up prices, boosting demand and prices for used vehicles, which benefits CarMax's core business. * CarMax is attractively valued with solid revenue growth, but faces significant risks from its large auto loan portfolio and rising delinquencies. * Despite recent stock declines and credit quality concerns, I rate KMX a buy, but recommend only moderate investment due to high risk. * Investors should monitor credit trends and competition closely; CarMax offers upside, but it's not a long-term lockbox stock for me.\n\n**Thesis** Automobiles have become quite expensive in recent years, with the average new light vehicle rising. With tariffs now coming into play, expect new car prices to rise even further. This should provide tailwinds for used car prices. While used cars may not be affected directly by tariffs (although they could be, say if you had to buy a needed car part for repairs from abroad), rising new car prices could push some people to opt for used instead. More demand, meanwhile, means higher prices. The above trends make CarMax (NYSE:KMX) an attractive buy. Stock prices have slid dramatically in recent weeks, despite strong results in the first quarter, as reported on June 20, 2025. The biggest risk with KMX seems to be credit quality in its finance division, which currently has more than $16 billion in outstanding loan assets. Make no mistake, these concerns are legitimate, and defaults on car loans have been ticking up. Still, with a market cap at just $8.42 billion, I believe KMX is undervalued. Add in decent revenue growth, a favorable PE ratio, and various other factors, I believe that KMX is worth a buy. The risks are substantial, so I’d keep investments modest, but the upside is there.\n\nUsed Car Demand and Values Amid a Global Trade War Automobiles imported from Japan will face a 25% tariff, which is down from the 25% tariff they previously faced. South Korean autos are also being hit with tariffs. The European Union must impose tariffs, although it wouldn’t be surprising if this rate is eventually dropped to 15%. Cars from Mexico and Canada are being hit with tariffs too, even though most of the cars are being produced by American automakers. Crucially, tariffs will almost inevitably drive new car prices up. Automakers operate on thin margins. Toyota’s (NYSE:) net profit margin TTM was last reported at 9.92%. This is far better than GM’s (NYSE:) 2.55% and Ford’s (NYSE:) 1.7%. Yet even with a ~10% net income margin, Toyota won’t be able to absorb all of the costs of tariffs. Other automakers are in even more difficult positions. It wouldn’t be a shock if domestically produced car prices rise as well. First, some imported auto parts are being hit with tariffs, raising production costs. Second, demand for domestic cars and their lower price tags could still exert upward pressure on prices. Many buyers previously considering imports may shift to domestic units, thus driving up demand and in turn prices. While the price increase owing to rising demand may not be as high, it’ll likely still be substantial. Many people looking to buy a new car may end up having to turn to used cars. As they say, the second you drive a car out of the dealer’s parking lot, its value plummets. Used cars offer a relatively affordable proposition in many cases. \"Relative\" is the key word, however. The Manheim Used Vehicle Value Index in June rose 6.3% from May. That may not seem especially concerning, but it’s up 6.3% from a year prior. Other data actually shows used car prices from a month prior, down 1.5%, but still up 2.4% YOY. CarMax keeps around 50,000 cars in inventory, and the value of most of those automobiles should end up increasing in value as tariffs push car prices up overall. That said, rising used car prices do present a bit of a double-edged sword, as CarMax may end up paying more for the used cars it acquires. Still, rising demand as more customers shop used to save cash should provide more headwinds than tailwinds.\n\nKMX Sales Highlights From The Last Quarter CarMax enjoyed strong performance to the 2026 fiscal year with the number of units sold. Units sold increased by 9% overall and with same store sales up 8.1%. Revenues grew more slowly at 6.6%. The average selling price contracted as shown below, but there's an important silver lining: sales of cars 10 years or older were up, with an estimated 25,000 such vehicles sold. These older cars should offer affordability, something that could play well in the current economy. That said, older, cheaper cars are likely purchased more often by sub-prime borrowers.\n\nKMX Fundamentals and Valuation The risks associated with CarMax become more obvious as you dig into the fundamentals. The last reported net income margin (TTM) came in at just 1.95%, leaving little margin for error. The gross profit margin (TTM) is rather low as well, at 12.47%. Carvana (NYSE:), which also sells used cars, enjoys a gross profit margin of nearly 22% and a net profit margin of 3.46%. Yet Carvana also has a GAAP PE ratio (TTM) of 91.59, versus CarMax’s 15.51. The substantially higher PE ratio enjoyed by Carvana can be further explained by its 39.48% YOY revenue growth, versus CarMax’s 3.54% growth. CarMax also has only $262.8 million in cash and short-term investments on hand and just over $200 million in accounts receivable. Current liabilities, meanwhile, top $2.77 billion, with accounts payable totaling $980.5 million. In total, CarMax has $27.386 billion in assets, but $16.802 billion of this is in the form of loans. As discussed in the next section, these loans could be a serious risk should defaults start to rise. Especially if the economy stalls, people could quickly fall behind on payments. To get a better grasp of CarMax’s valuation, I turn to a valuation calculator. This calculator offers an EPS measurement, and KMX’s GAAP EPS growth YOY weighed in at 6.29%. I set the EPS growth for the EPS calculation at 5%, assuming that earnings may slow a bit owing to a potentially slowing economy and potential issues with loans souring. Still, the calculator finds KMX deeply undervalued. (I set the discount rate at 10% as I use that as a standardized rate to compare companies. The terminal growth rate is set at 4% to line up with generally observed global GDP growth.) GuruFocus The above calculation includes the tangible book value, which includes KMX’s vast portfolio of auto loans. These loans are indeed major assets, but there is a risk of them souring. If you exclude the tangible book value, obviously, CarMax’s position looks much worse, as shown below. Ultimately, KMX’s valuation will be heavily determined by how valuable its outstanding loans are. We can’t assume all will be repaid in full, and an economic contraction could cause many to sink into the red. The non-performing loans came in at $474.2 million, which was good for 2.76% of auto loans held for investment. In the last quarter, it measured only 2.61%. GuruFocus Seeking Alpha’s quant tools and my fellow analysts both rate KMX as a hold. Interestingly, KMAX gets decent overall marks, with momentum being the only genuinely bad mark. One has to wonder if perhaps the momentum struggles are due to mispricing and underestimating the value of KMX’s assets. That said, with the value of KMX’s assets at least questionable, I do believe the risks are high enough to warrant caution. So while I rate KMX as a buy, I still think investments should be moderate.\n\nDon’t Overlook Credit Risks, Among Other Challenges So why might I be wrong? The biggest risk factor appears to be credit quality in KMX’s credit segment. As mentioned above, CarMax has $16.802 billion worth of loan assets stemming from its finance division. So long as those loans are paid, that’s good news. Yet if the loans sour, KMX could quickly find itself in dire straits. Still, just half of the loan assets value matches CarMax’s $8.4 billion current market cap. That said, KMX also has significant debt, including ~$16.64 billion in non-recourse debt and a bit over $21 billion in total liabilities. The CarMax Auto Finance () division is CarMax’s big profit driver, bringing in $141.7 million in income, which is a 3.6% decline YOY. This number is concerning on its own. It becomes more dire when you step back and see that both prime and subprime auto loan delinquencies have been ticking up. Data shows a small uptick in prime loan delinquencies and a more substantial uptick in subprime. Add in sluggish job growth and mounting inflation, and it's easy to envision households coming under financial pressure. This could lead to mounting losses. Yet cars are essential, and families will likely try to keep up with payments as much as they can. Especially with car prices rising due to tariffs, many families will find the car already in their driveway being the best value they're likely to get. Of course, sometimes the bills simply can't be paid, but I suspect KMX may suffer lower defaults than many would expect. There are other risks as well. President Trump could change course and drop tariffs on automobiles, especially if inflation mounts. Meanwhile, Amazon is looking to get into the used car business, which seems a bit strange, and I question the move, but still, it’s Amazon; they have ample resources and clout. Carvana could come to dominate the used car market as well.\n\nKey Take-Away: Upside is Enough for a Moderate Investment This is a higher risk investment. Deteriorating credit quality will pressure CarMax. It remains to be seen if it’ll overwhelm them. For now, tariffs provide tailwinds, and the economy seems to be somewhat stable, albeit perhaps increasingly sluggish. If the economy contracts, high chance that auto loan delinquencies spike. Even if the economy treads water, inflation will pressure household budgets, which in turn could cause delinquencies to rise. Still, the valuation, relatively low market cap, revenue growth, income growth, and other positive factors make KMX an attractive buy at current prices. That said, I prefer to pick stocks to go long that I’d feel comfortable throwing into a lockbox that I can’t unlock for two years. KMX isn’t one of those stocks. I’d advise investors to keep a close eye on the stock while being apprised of the risks. This article was written by a professional investor with experience in marketing, business strategy, and economic analysis. The author emphasizes the importance of observing megatrends and fundamentals in investment decisions. While personal interests include macrotrends and emerging technologies, the analysis is grounded in financial fundamentals, leadership quality, and product pipeline. The article expresses a cautious optimism about CarMax’s potential, highlighting the trade-off between upside and risk. The author discloses no stock or derivative positions in the companies mentioned and has no business relationship with any of them. The article is an independent opinion and does not represent Seeking Alpha as a whole. Past performance is not a guarantee of future results. No investment advice is given, and readers are advised to consult a financial advisor. Seeking Alpha is not a licensed securities dealer, broker, or investment adviser.

CarMax Could Be A Used Car Lot Value Buy (NYSE:KMX)

CarMax (NYSE:KMX) is positioned as an attractive investment opportunity due to rising used car demand driven by tariffs on new vehicles, which are pushing up new car prices and increasing demand for affordable used cars. Despite strong first-quarter sales performance and a relatively low market cap of $8.42 billion, the company faces significant credit risks from its $16.8 billion auto loan portfolio, with rising delinquencies, particularly among subprime borrowers. While CarMax reports solid revenue growth and a favorable PE ratio, its low gross and net profit margins, high liabilities, and exposure to economic downturns present substantial risks. The article concludes with a cautious buy recommendation, advising investors to maintain moderate exposure due to high volatility and credit quality concerns, while monitoring competition from Carvana and Amazon's potential entry into the used car market.