NEW YORK (Reuters) - Shares of CarMax Inc (KMX.N), the biggest U.S. used car dealer, are vulnerable to a 20 percent decline if investors are unnerved by falling used vehicle prices and weakening credit quality when it reports its results, Barron's said on Sunday.
The company is scheduled to report fourth-quarter and fiscal year ended Feb. 28, 2017 results on April 6.
CarMax's captive auto finance unit contributes about 40 percent of the company's operating income and could come under pressure as defaults and delinquencies rise, the report said.
Last year, the company rolled out an online financing initiative to help customers pre-qualify for a loan before a store visit, hoping to improve customer conversion rates.
The economy is becoming less friendly to used-car buyers, personal bankruptcies have ticked up in recent months and interest rates are on the rise, meaning CarMax might find itself underreserved for loan losses, according to Barron's.
"CarMax seems sure to continue to grow sales by opening new stores but if the company encounters rude surprises in its loan portfolios, and falling vehicle prices pinch margins, investors could send the stock lower in its historical valuation range," the report said.
CarMax shares closed down 1.4 percent at $59.22 per share on Friday and have fallen more than 8 percent so far this year.
Reporting by Devika Krishna Kumar in New York; Editing by Meredith Mazzilli