Tax Rate Assumption Change Drives Most of CarMax's Fair Value Estimate Change

We are raising our CarMax fair value estimate to $155 from $138. The change is from time value of money ($3 of the change), about a 4% increase in revenue modeled over our five-year forecast period ($4), and from lowering our tax rate ($10) for fiscal 2023-26 back to 25% from the increase to 30% made last June 25. CarMax reports fiscal 2022 fourth-quarter results on April 12. As discussed in our Dec. 23 note, given recent political developments around the Build Back Better bill, we are reversing our forecast from summer 2021 that the U.S. corporate tax rate will rise to 26% in 2022. CarMax has high sensitivity for its fair value estimate to our tax rate assumption because it operates exclusively in the United States. We now believe the U.S. statutory tax rate will remain at 21% at least through President Joe Biden’s remaining term, which ends in early 2025. Considering recent polling numbers and midterm election patterns, we would not be surprised to see Democrats lose a majority in at least one of the congressional bodies after 2022’s election, which would prevent passage of such significant legislation in the remainder of Biden’s term. Any way we slice it, the Build Back Better bill may not pass, and even if a slimmed-down version passes in 2022, we think it is highly unlikely that the U.S. corporate tax rate will increase, given various Senate objections to the bill.