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CarMax (KMX)
CarMax Speeds by Estimates
One month after the ‘cash for clunkers' program ended, car dealers are still trying to figure out what they can do to lure consumers back in. As consumers drive past dealerships they may recognize fewer vehicles present on the lot. Most would assume that the auto industry is still performing well without the government's incentive program. In reality, most of these lots are still empty because car dealers unloaded a large percentage of their inventory during the cash for clunkers program and haven't replenished the lots since that time. CarMax was one of the dealers that reaped the benefits of the program. The company's earnings surged during its fiscal second quarter, exceeding analysts' expectations. How did a company that focuses mainly on used cars benefit from the program? Will the surge in earnings spill over into subsequent quarters or will the company head back into the danger zone?
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| Stock Analysis |
CarMax Inc. reported that net income rose more than seven-fold to $103.0 million, or 46 cents a share, from $14 million, or 6 cents a share, a year ago. Analysts were expecting earnings of 18 cents a share, before special items, on revenue of $1.77 billion. The cash for clunkers program provided a $4,500 trade-in credit to consumers that exchanged their old cars for new and more fuel efficient vehicles. One key part of the program was that the vehicles being purchased needed to be new. CarMax focuses heavily on the sale of used cars, but does have new cars available for purchase. So how did the program exactly help the company? CarMax CEO Tom Folliard gave some credit to Uncle Sam. “The government's cash-for-clunkers program resulted in a spike in traffic in late July and August,” While the incentive program did help with sales, it was the success of the company's used offerings that really propelled earnings beyond forecasts. In fact, consumers overwhelmingly turned to the dealer last quarter for used vehicles which made up 97 percent of all vehicles sold. Cash-strapped consumers are much more likely to buy an older vehicle at a lower price rather than a newer one with a larger price. The Richmond, VA based company also benefited from the increase in consumer sentiment. Consumers became more confident in the automotive industry as the cash for clunkers program increased sales and required manufacturers to produce more vehicles to keep up with demand.
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Now that the hype surrounding the auto industry had died down, a lot of dealers are back to square one. As mentioned earlier, the bulk of CarMax's recent success came from its used car market. If the company is able to maintain the same interest in its used offerings, it will likely see earnings continue to grow at a rapid pace. The company may experienced some issues if consumers turn back to new car market especially since car dealers are rolling out their own incentive programs. General Motors has already announced a program that mimics the one offered by Hyundai. Both companies are allowing buyers to return newly purchased vehicles within a specific timeframe if they are not satisfied with their purchase. Overall, CarMax has definitely made a positive step in the right direction. The stock which closed Monday at $19.33 per share, is up 145 percent in 2009 and 27 percent higher than one year ago.
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Other Stuff Related to CarMax
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Carmax- The Way Car Buying Should Be?
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