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In a note to clients Tuesday, Morgan Stanley analysts maintained an Overweight rating on CarMax (NYSE:KMX), cutting the price target to $90 from $124 per share.
The analysts were positive about the company, stating it is Morgan Stanley’s “highest quality used name with 30% upside.” However, following the company’s lower-than-expected second-quarter result, the firm lowered its forecasts.
“While CarMax may have been the first, we certainly do not believe it’s the last we will hear of demand destruction and missed metrics this earnings season,” wrote the analysts. “If the recent moves in Manheim are any indication (down ~4% in August, and another ~2% in the first half of Sept), there is earnings risk to those exposed to the used car market.”
They explained that compared to last year, used car sales have slowed as consumers begin to be impacted by rising rates, elevated prices, and inflationary pressures in their everyday lives.
“KMX may be ‘first in’ on feeling the impact of used car decline, but we expect the entire auto retail (franchise dealers) and auto credit complex to follow,” they added.
However, despite headwinds, Morgan Stanley remains bullish on Carmax and expects the company to “successfully execute their Omni channel strategy, providing both online and physical dealer options to consumer.”
“Long term, we estimate strong growth in same store sales along new store openings, allowing KMX to achieve operating leverage, with upside from the omni-channel rollout,” wrote the analysts.
