KMX

CarMax ($KMX) Directors Signal Undervaluation with Consecutive Purchases Amid 30% Year-Long Decline

10/06/2025 20:15

An intriguing signal is emerging from used car retail giant CarMax ($KMX). While the stock has plummeted over 30% in the past year, company directors have been making consecutive purchases, drawing significant investor attention. Based in Richmond, Virginia, CarMax is America's largest used car retailer, operating 252 stores nationwide and generating approximately $28.3 billion in annual revenue. The company creates value through a diversified business model that includes used car sales, financing services, and extended warranties, employing around 30,000 people. The most notable development is the directors' buying activity in early October. Director Mitchell Steenrod purchased 2,000 shares at $45.57 per share for $91,140 on October 2nd, while Mark Oneil purchased 10,816 shares at $46.21 per share for $499,807 the same day. Notably, Steenrod had also bought 1,300 shares at $65.49 in April, demonstrating consistent buying conviction despite the stock's decline. This contrasts sharply with the selling activity from executives over the past year. From June 2024 to January 2025, executives including President William Nash sold approximately $27 million worth of shares, making the recent director-level purchases particularly significant as they signal a potential shift in internal sentiment. $KMX shares fell over 35% from their July 2024 peak of $84.44 to an August 2025 low of $54.66. Currently trading around $59-61, the stock remains over 30% below year-ago levels. This poor performance reflects a combination of structural challenges in the used car market and the company's high debt burden. Financially, CarMax faces significant challenges. As of Q2 2025, the debt-to-equity ratio stands at 312%, with a thin net profit margin of just 1.84%, highlighting urgent needs for profitability improvement. However, Q1 2025 showed temporary recovery with revenue of $7.55 billion (up 6.1% YoY) and earnings per share of $1.38 (versus $0.97 the prior year). The broader used car market situation is complex. Margin pressure continues as used car prices normalize from their post-COVID highs, while competition from online platforms like Carvana intensifies. However, growing demand for vehicles under $20,000 could favor CarMax's extensive inventory strategy. Wall Street analysts maintain cautious optimism. Eleven of 18 brokerages maintain 'buy' ratings or higher, with a median price target of $81, suggesting approximately 35% upside from current levels. In March, Stephens upgraded the stock to 'overweight' with a $90 price target. The signal investors should watch is clear: while shares trade near yearly lows, directors with intimate company knowledge are investing their personal capital. Steenrod's purchases at both $65 in April and $45 in October particularly suggest strong conviction about current valuation levels. In an optimistic scenario, used car market stabilization could drive CarMax's market share expansion. As online competitors face profitability pressures, CarMax's physical store network and proven business model could provide competitive advantages. Despite high debt, $1.21 billion in operating cash flow provides adequate operational cushion. However, significant risks remain. Economic recession could sharply reduce used car demand, while rising interest rates directly impact the financing business. The 312% debt-to-equity ratio creates vulnerability to increased financing costs. Overall, CarMax likely trades in undervalued territory, but timing and position sizing remain crucial. While director purchases provide positive signals, sustained stock recovery requires fundamental improvement and market condition stabilization.