Shares of vehicle retailer Carmax (KMX: Charts, News, Offers) plunged more than 7% on Thursday after it announced fourth quarter earnings, despite soundly beating analysts’ expectations for revenue and earnings per share. The company reported an EPS of 38 cents, or $89.51 million, which beat the Wall Street consensus by a cent, an improvement over its EPS of 33 cents a year ago. Net sales and operating revenue increased 23% to $2.25 billion from $1.83 billion a year ago, exceeding analysts’ expectations of $2.17 billion. Both figures exceeded its previous quarter’s EPS of 36 cents per share and revenue of $2.12 billion. Same store sales increased 13%, which its used vehicle segment’s sales increasing 14% to generate revenue of $1.8 billion, a 17.8% increase over the $1.53 billion reported a year earlier. New and wholesale vehicle sales increased 33.8% and 60% respectively. Lastly, the company posted an 18.5% increase in other sales and revenues, generated by extended service plans, ESP revenues and third-party license fees. All these figures are proof of solid, steady growth, so why was the stock bitten so hard by the bears?
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Carmax’s shrinking margins – down from 14.5% last year to 14.2% this quarter, were the key concern for analysts. However, to long term investors, the 0.3 of a percentage point drop should not be a concern. While some analysts and investors attribute the decline to smaller margins due to rising component costs, a more rational culprit would be inflation and the weak U.S. dollar, as Carmax conducts its business solely in America. It has wholesale agreements with General Motors (GM: Charts, News, Offers), Chrysler and Toyota (TM: Charts, News, Offers), among others. The earthquake and tsunami in Japan has already increased demand for used Japanese vehicles in car rental companies resale channels, and is likely to cause the same increase in Carmax’s superstores. Therefore, margins should easily return to normal once the U.S. dollar rebounds and the full effects of the Japanese earthquake are felt throughout the used auto industry. In addition, a resolution of the Libyan conflict would also bode well for auto manufacturers and retailers, which rely on lower gas prices.
The Richmond,Virginia-based company currently operates 100 car superstores in 46 metropolitan areas across the United States, through which it sells an average of 350,000 vehicles annually. It also sells an average of 200,000 vehicles through online auctions. The company plans to open between eight to ten stores by fiscal 2013.The company purchases and refurbishes used vehicles for resale. 90% of its purchased used vehicles are between one to six years old with fewer than 60,000 miles. The company’s largest wholesale customers include car rental agencies such as Hertz (HTZ: Charts, News, Offers) and Avis (CAR: Charts, News, Offers).
The company has benefited from the recession as well as current economic uncertainties, which sells more used cars during economic downturns. Rising oil prices, however, have the adverse effect of decreasing vehicle use and new vehicle purchases. The company has successfully used its website (www.carmax.com) to attract vehicle sellers and is able to maintain a liquid inventory which can quickly adapt to changing market supply and demand. The company aims to maintain its competitive edge through fast turnaround, warranties and a firm no haggle-policy. Although Carmax is the largest used vehicle retailer in the world, its market share of used vehicles is a mere 2%, and the second largest retailer, Autonation (AN: Charts, News, Offers), holds a 1% sliver. This is due to an immensely fragmented used vehicle market throughout the United States, comprised of a legion of small-time local competitors. A final consideration would be the eventual shift of the consumer paradigm toward hybrid and electric vehicles, with are costly both new and used.
Shares of Carmax, in its depressed state, trade at 17 times forward earnings with a PEG ratio of 1.43. The company also has a 5-year sales growth rate of 4.26% as opposed to the industry average of -4.2%. While shares are unlikely to double or triple anytime soon, Carmax has been oversold for no clear reason, and the sell off may be an investment opportunity for patient conservative investors.
Other News About KMX
CarMax 4Q net income rises on used car sales
CarMax posts strong results for the fourth quarter.
CarMax Beats But Margins Shrink And Stock Sinks 7%
CarMax slips on slightly shrinking margins.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
