Can CarMax maintain its earnings track record?

Analysts expect to see a profit of 53 cents a share

By Benzinga Jun 20, 2012 5:24PM
Image: Couple shopping for a new car © Tetra Images/Getty ImagesBy Nelson Hem, Benzinga Staff Writer

Used-car retailer CarMax (KMX) has seen profit rise for three straight quarters and revenue rise for four straight quarters. Will it capture the magic again Thursday when it reports its fiscal first-quarter results?


Investors certainly hope the trend continues, although recent easing fuel prices may have taken some pressure off of consumers to buy more fuel-efficient models. (See also: Ford and GM feeling Europe's economic despair.)

Here's the latest buzz on CarMax's quarter:


Expectations


Analysts predict CarMax will report a profit of 53 cents a share on revenue of $2.8 billion. A year earlier, the auto retailer reported profit of 55 cents a share on $2.7 billion in sales. Note that the EPS estimate is 1 cent less that it was 60 days ago. CarMax exceeded consensus EPS estimates in its fiscal fourth quarter, but narrowly fell short in the two quarters before that.


The company reported fourth-quarter revenue of $2.5 billion and net earnings of $95 million, or 41 cents a share. Both the top and bottom lines exceeded expectations. Same-store sales were up year-over-year for both the quarter and the full year. CarMax attributed the growth in sales to strong subprime financing, and also said that it expects to open 10 stores this year and 10 to 15 stores in 2013. (See also: CarMax Q4 Beats Estimates on Strong Subprime Financing.)


The forecast for the current quarter has EPS and sales about the same as the first-quarter estimates, which would represent a revenue increase of 8.2% -- but flat earnings -- compared to a year earlier. So far, analysts expect fiscal 2013 per-share earnings and revenue to be up by single-digit percentages.


The company


CarMax is primarily a retailer of used vehicles in the United States, with more than 110 locations in 55 markets. The company also sells new vehicles under franchise agreements with Chrysler, General Motors (GM), Nissan, and Toyota (TM). It provides financing options to customers, as well as a range of other related products and services. It also sells cars to licensed dealers. CarMax was founded in 1993 and is headquartered in Richmond, Va. It is a component of the S&P 500 and has a market cap of $6.37 billion.


Competitors include America's Car-Mart (CRMT), AutoNation (AN) and Penske Auto Group (PAG). In its most recent quarter report, America's Car-Mart topped consensus EPS expectations but revenue grew less than predicted. Analysts expect AutoNation and Penske to post solid EPS and sales growth when they report second-quarter results in July. (See also: AutoNation Pops as New Vehicle Sales Increase 45%).


During the three months ended in May, CarMax opened new stores in Bakersfield, Calif.; Fort Myers, Fla.; Lancaster, Penn. and other locations. It also announced that, in an effort to reduce energy consumption, it had installed solar panels in locations including Phoenix, Ariz., as well as Irving and Fort Worth, Tex.


Performance


CarMax's long-term earnings per share growth forecast is 12.5%. Its price-to-earnings ratio is higher than the industry average, but so is its operating margin. The return on investment is 16.8%, which is higher than those of its competitors. Short interest is 7.1% of the float. Ten of 15 analysts who follow the stock rate it a "buy" or "strong buy;" none recommend selling shares. Their mean price target is more than 24% higher than the current price.


Shares of CarMax closed Wednesday at $27.90, more than 8% lower than at the beginning of the year. Shares have pulled back more than 19% over the past quarter from near a 52-week high. The share price is below both the 200-day and 50-day moving averages. Over the past six months, the stock has underperformed the competitors mentioned above, as well as the broader markets.


ACTION ITEMS


Bullish: Investors interested in exchange traded funds (ETFs) invested in CarMax might want to consider the following. Over the past six months:

  • Guggenheim Sector Rotation (XRO) is trading more than 26% higher.
  • Consumer Discretionary Select Sector SPDR (XLY) is up nearly 17%.
  • Rydex S&P Equal Weight Consumer Discretionary (RCD) has rallied more than 15%.
  • SPDR S&P Retail (XRT) is up about 14%.

Bearish: Traders may prefer to consider these alternative positions in the same industry. Over the past six months:
  • Asbury Automotive Group (ABG) is up more than 25%.
  • KAR Auction Services (KAR) is up about 23%.
  • Penske Automotive Group (PAG) is up about 22%.
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