CarMax Loan Delinquencies Tick Higher In May, Signaling Renewed Credit Strain

Wedbush maintained an Outperform rating on CarMax with a $90 price target despite recent data showing a rise in loan delinquencies and net losses at CarMax Auto Finance (CAF), with May's delinquency and loss rates accelerating more sharply than typical seasonal trends. While acknowledging the potential impact on future loan loss provisions, the analyst cites CarMax's robust sourcing methods, integrated credit capabilities, and healthy gross profit margins amid a healthy used auto market as reasons for continued outperformance relative to peers. The analyst projects first-quarter revenue of $7.67 billion and earnings per share of $1.23.

Analysis

Wedbush has reiterated its Outperform rating and $90 price target for CarMax, despite new data from CarMax Auto Finance (CAF) revealing a concerning uptick in loan delinquencies and net losses in May. This deterioration saw delinquency and loss rates accelerate more sharply than typical seasonal trends and worsen year-over-year; specifically, the portfolio-level delinquency rate (excluding the 2025-A non-prime for comparability) increased 36 basis points sequentially, markedly above the 18bps historical seasonal average, while the cumulative loss rate increased 8bps versus a 1bps historical average. Year-over-year, the portfolio-level delinquency rate rose 16bps, trending less favorably than the trailing three-month trend, and the cumulative net loss rate increased by 52bps, consistent with recent trends. Critically, newer securitizations are performing no better, and in some cases worse, than older vintages, with the most recent prime securitization's delinquency rate trending at or above those of older pools. Wedbush acknowledges that sustained credit weakness, potentially amplified by CarMax's increased lending to Tier 2 and Tier 3 borrowers to support interest margins, could elevate future loan loss provisions, a factor already incorporated into their estimates. Nonetheless, Wedbush's positive outlook is underpinned by CarMax's robust sourcing, integrated credit capabilities, healthy gross profit margins in a resilient used auto market, and outperformance against publicly traded franchised dealers, leading to a Q1 projection of $7.67 billion in revenue and $1.23 EPS.

Key Decisions for Investors

• Investors should carefully weigh CarMax's operational strengths and market outperformance against the clear and accelerating deterioration in its auto loan portfolio's credit quality.
• Closely monitor upcoming CAF securitization data for sustained adverse trends in delinquencies and net losses, particularly the performance of newer loan vintages and the impact of increased lending to lower-tier credit segments.
• Evaluate the potential for increased loan loss provisions to materially impact future earnings, and assess whether CarMax's strategies for maintaining margins and market share can sufficiently mitigate these escalating credit headwinds.