CarMax Faces Securities Investigation, Adding to Governance and Legal Risks

What happened

On July 16, 2026, Bernstein Liebhard announced an investigation into CarMax on behalf of shareholders who purchased shares before June 20, 2025. This follows a series of negative events including a 52% share price decline, abrupt CEO termination, and extremely high leverage with net debt/EBITDA of 17.9x. CarMax's business is under pressure from declining used-car volumes, rising credit losses on CAF loan vintages, and intense competition from online rivals. The investigation introduces additional legal uncertainty and potential liability, though the underlying financial and operational risks were already well-documented. While the stock appears cheap on trailing P/E of 12x, the balance sheet fragility and recent leadership turmoil suggest limited margin of safety.

Implication

The investigation by Bernstein Liebhard is a red flag that could lead to costly litigation and management distraction, compounding existing governance concerns after the CEO's termination. CarMax's capital structure is dangerously leveraged with net debt/EBITDA near 18x and interest coverage only 0.3x, leaving no cushion for operating disappointments. The company's captive finance unit faces rising delinquencies from 2022-23 vintages, and wholesale used-car prices remain volatile, pressuring both retail and CAF margins. Even at a ~52% discount from 12-month highs, our DCF analysis suggests intrinsic value around $13.71 per share, far below the current $41.41, implying significant downside. Until CarMax demonstrates sustainable deleveraging, credit improvement, and credible strategic leadership, the risk/reward remains unfavorable.

Thesis delta

The existing STRONG SELL thesis is maintained and reinforced. The securities investigation adds an incremental layer of legal and reputational risk but does not alter the core fundamental concerns around leverage, credit quality, and earnings power. The stock continues to offer insufficient compensation for the high probability of adverse outcomes.