CarMax: Market Should Give New CEO a Chance to Change Results

Key Morningstar Metrics for CarMax

• Fair Value Estimate: $99.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

On Feb. 12, CarMax KMX announced former InterContinental Hotels Group chief executive Keith Barr will become CEO and join the board effective March 16. The stock fell over 12% during Feb. 12 trading.

Why it matters: We speculate that the market is disappointed with the choice, since Barr spent over 20 years at IHG, but we prefer to see what changes he makes and not pass judgment before his tenure at CarMax has even started. We are not surprised that the company picked an auto industry outsider.

• We met with CarMax management in mid-November and took away that it was open to an outside hire, particularly someone with extensive e-commerce experience. Barr successfully revamped IHG’s reservation system, which likely was a key reason for his hire.
• Consumers interact with a hotel both in person and online, just as CarMax’s omnichannel shopping is both online and in store. If Barr’s digital commerce and customer service knowledge can transfer to benefit CarMax, his hire will prove wise. If not, the stock will be stuck in mediocrity.

The bottom line: We are not changing our narrow moat rating or $99 fair value estimate on CarMax. We continue to believe the shares are significantly undervalued, and the current downturn is a rare buying opportunity while the company revamps its marketing around its digital capabilities.

• CarMax already has the digital tools to compete with online used vehicle retailers. If Barr can effectively leverage those capabilities to reverse recent comparable store unit sales trends, then we expect the stock to move up quickly from that point in time.
• Barr’s first earnings call will be on April 14. We expect some high-level strategic objectives and hope he maintains share repurchases. We think CarMax should be making its website as easy and efficient as possible to buy a vehicle and then make consumers more aware of that capability.