CarMax's Q3 Weakness Confirms DeepValue's STRONG SELL Thesis on Leverage and Cyclical Risks

What happened

CarMax reported a drop in third-quarter revenue and profit, hurt by weaker demand and falling prices in the U.S. used vehicle market, as highlighted in a Reuters article. This aligns with the DeepValue master report's STRONG SELL judgment, which emphasizes the company's fragile capital structure with extreme leverage, such as net debt/EBITDA at ~17.9x and interest coverage of only ~0.3x. The report had warned of CarMax's exposure to cyclical used-car pricing and credit risks in its CarMax Auto Finance (CAF) segment, which are now materializing in the quarterly results, eroding earnings power. Additionally, governance risks are elevated due to the abrupt CEO termination in December 2025, adding execution uncertainty during this downturn. Overall, this news reinforces the report's critical view that CarMax's high debt and volatile cash flows leave little margin of safety, with intrinsic value estimated at ~$13.71 per share versus a current price around $41.

Implication

The quarterly decline confirms CarMax's acute sensitivity to used-car market cycles, which are currently under pressure, threatening near-term profitability and cash flow stability. High leverage metrics, such as net debt/EBITDA of ~17.9x, mean that even modest earnings drops could impair debt servicing, risking balance sheet distress without deleveraging. Governance instability from leadership turnover complicates strategic execution, making it harder to address operational inefficiencies and credit cost increases in CAF. With intrinsic value from DCF analysis at ~$13.71 per share, the current price around $41 appears overvalued, suggesting limited upside and potential for further depreciation. Therefore, investors should avoid or reduce positions until clear evidence emerges of sustained unit growth, improving credit metrics, and a credible plan to repair the balance sheet under new management.

Thesis delta

This news reinforces the STRONG SELL thesis by providing tangible evidence of the cyclical pressures and earnings weakness previously highlighted in the DeepValue report. It underscores the urgency of monitoring key watch items, such as balance sheet deleveraging and CAF credit trends, as continued deterioration could accelerate downside risks. No fundamental shift is needed, but the thesis is strengthened, with the risk/reward profile remaining skewed to the downside given the confirmed market headwinds and operational challenges.