Strong used-car sales propel CarMax

The company has seen four straight quarters of double-digit revenue and profit gains. The stock, however, is already up more than 30% this year.

By Stock Traders Daily Sep 30, 2013 3:58PM

Image: Couple shopping for a new car © Tetra Images/Getty ImagesBy Neal Rau, Stock Traders Daily

 

CarMax (KMX), the nation's largest retailer of used cars, is growing and continues to post impressive numbers.


The company sold 447,728 used cars in the U.S. in its last fiscal year through 118 dealerships. It just posted four straight quarters of double-digit sales and earnings growth, but the stock is up over 30% this year after a recent pullback. So is KMX a buy, sell or hold?

 

CarMax is a used-car retailer with a unique business model. It sells cars at a premium, does not negotiate on prices, and has no new car inventory. The company will also make an offer to buy your car, typically at a higher price than trade-in value.


CarMax has a tremendous opportunity to continue to expand into new untapped markets. Currently, this retailer of used cars is the market leader in a very fragmented industry, and right now, it holds only about a 3% market share. 

 

Nationwide, sales of new cars rose 17% in August to a near-record of over 16 million -- the fastest pace since December 2007. While new car sales have driven much of the growth, dealers also have benefited from a bigger focus on used-car sales to cost-conscious buyers. 


CarMax's business showed substantial strength in the first quarter. The company's results included a 19% jump in revenue that translated into a 22% net income gain from a year earlier. Those marks represented new records for sales and profits at CarMax. 


The stock made a 52-week high in early September, but recently pulled back after a downgrade from Goldman Sachs (GS). According to the Stock Traders Daily real-time trading report, the stock is near a test of support, which might provide a good entry point.   

 

CarMax reported its second-quarter results in August, posting earnings of 62 cents per share, 6 cents better than the consensus estimate, as revenues rose 17.7% from a year earlier. Total used-vehicle unit sales grew 21% and comparable-store sales grew 16%. Sales benefited from improved execution in stores and an improved consumer credit environment. As the economic environment looks positive going into 2014, the company is looking to expand by adding stores and hiring new employees.

 

CarMax has been one of Fortune magazine's "100 Best Companies to Work For" for nine consecutive years, and currently is recruiting for more than 1,000 positions in locations across the country. In addition to an improving economy, the company also stands to benefit from an aging fleet of cars on the road. The average age of cars is 11.5 years, according to industry estimates, which is well above the average of nine years established a few years ago.  Considering CarMax averaged 10 cars sold per day from every dealership in 2012, and with such a small market share, an expansion into new markets could result in a very positive 2014 for shareholders.    

 

CarMax has outperformed other automotive retailers because of its focus on newer used vehicles, which range from almost new to six years old. In the last fiscal year, 87% of cars the company sold represented that range. Many cost-conscious consumers want to avoid that instant drop in value as you drive a new car off the lot. AutoNation (AN), which also sells new cars, reported new-car revenue double that of used-car sales. However, one notable risk with AutoNation is the fact that the company generates nearly half of its revenue from California and Florida, two high cost-of-living states with still fragile housing markets. 

 

Currently, CarMax is only in 50% of U.S. markets and is only in the first of its three-year growth plan, as it hopes to create 10 to 15 new stores each year.  The stock is near a test of support, as defined in the real-time trading report published by Stock Traders Daily. As a rule, we are buyers near support, and as long as the stock remains above support we expect higher levels and a test of resistance. However, support also acts as our risk control, and if support breaks lower, the otherwise positive bias that exists now would dissolve, and sell signals would surface.


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