Stock of the Day
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CarMax (KMX)
Will the Recovery Slow CarMax Down?
There seems to be a fair amount of enthusiasm surrounding the largest used-car retailer in the country, CarMax. The Richmond-VA, based company reported earnings today for its fiscal first quarter which ended May 31st and they were well-ahead of expectations. Sales were down 17% but margins jumped as the retailer executed more efficiently and controlled costs associated with inventory management, reconditioning of cars etc. End result -- net income only dropped 2.7% and came in at 13 cents a share. The street was way behind at 4 cents a share, hence the roughly 15% jump in the stock price today. So has the stock gotten ahead of itself?
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| Daily Chart |
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| Stock Analysis |
CarMax should be credited with turning in a strong quarter in the midst of an extremely difficult retail environment and all the bad publicity surrounding the automotive market thanks to couple of high-profile bankruptcies. More efficient management of the business increased gross margins from 12.8% to 15.1% and the profit per used-car sale (a key metric for the company) jumped to $2,001 from $1,742 in the year earlier quarter. The stock bottomed out in November at $5.76 but since then has had a strong 2009, it started the year at $7.88 and closed at $13.96 yesterday booking a 77% gain before jumping another 15% today. Most analysts remain bullish on CarMax citing the recessionary environment which promotes used-car sales instead of new ones. The financing environment also seems to be on the upswing which has made it easier for CarMax's financing arm to securitize auto loans (e.g. via the TALF) and facilitate car purchases among its customer base.
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However, the street may be overlooking a few important points and may be too bullish on CarMax's prospects. By most accounts, we are certainly more than halfway through the recession, yes, there are questions about the pace of economic recovery but the worst is certainly over. That means CarMax will have lesser and leverage over new car dealers such as AutoNation (AN: Charts, News, Offers) going forward. As the economy starts to recover, new car sales will grow faster than used ones. Additionally, Congress has recently passed what is known as the 'cash for clunkers' bill which gives a $4500 cash coupon to individuals who trade in their low-mileage cars for more fuel efficient ones. This cash coupon will most likely not be given to customers who buy used cars (it is reserved for new car purchases) leaving CarMax out of the picture and costing it the increased traffic this stimulus will likely create. Also, if the restructuring plans of GM and Chrysler go as planned, then they will emerge out of bankruptcy with a much lower cost-base, which means that they will be able to churn out new cars at a cheaper price point. That would make news cars more attractive relative to used ones.
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But to be sure, CarMax does have some longer term secular advantages. It is the biggest player in the used-car market, a segment that is three times bigger than the new car market and has got the business model down pat. As is clear by looking at the company's latest earnings report, it is running the business very efficiently and can drive a lot of cost savings. But when things get a little rosier CarMax could run into the same customer migration to upscale products trend as a discount retailer like Wal-Mart.
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Profile |
Click here to view a detailed profile of CarMax.
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