Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Avoid CarMax Until Investors Hit the Brakes


It's a quality business, but playing off the stock's momentum may be risky.

The US auto market has been swamped with negative publicity over the last year, but investors are warming up to one industry player. Year to date, CarMax (KMX) has gained over 160%. And this morning, investors quick to play on the second earnings beat, sent the stock up 6% at the opening bell.

At a glance, they had reason for optimism. Sales rose 13%, comps were up 8%, and net income rose to $0.46 -- a substantial improvement from the $0.06 reported last year. Management credited the governments' Cash for Clunkers program for helping drive the increased sales. And overall, growth across the board appeared impressive due to easy comparisons from last year's weak quarter.

Beyond the headline numbers, I really like CarMax's focus on keeping a lean cost structure. Unlike ailing US auto manufacturers Ford (F) and General Motors (GMGMQ), CarMax operates a strong business model that's proven flexible enough to cut out unnecessary costs in tough times. Over the last six months, management has lowered expenses by $45 million.

The company has also done an excellent job maintaining tight inventory control; inventory levels rose just 7% during the quarter. Impressive inventory management, combined with rising used car prices, helped CarMax's gross margin grow 23%.

On a global scale, new-car sales from the likes of Toyota (TM), Honda (HMC), and Nissan have been beyond dismal. The industry has been in shambles throughout the past year or so.

However, used-car sales aren't looking quite as shabby. Competitor American's Car Mart reported earlier this month that their improving performance was attributed to a change in consumer spending habits. The company suggested that the used-car market was expanding and that there was room to gain market share as people trade down for more affordable used cars.

Overall, I think CarMax operates a quality business and I like the company as a long-term investment -- particularly if consumers continue working towards increased fiscal responsibility. Unfortunately though, I'm not so optimistic about playing off of the stock's recent momentum.

Despite reporting an impressive-looking bottom line, CarMax burned though operating cash flow during the quarter, indicating weak earnings. Thus, it's hard to say just how realistic that profit gain really is. In addition, I think paying 33 times trailing earnings is quite expensive for a company operating in an industry that was hit so hard during the recession.

Until investors hit the brakes on the recent CarMax buying spree, I advise sitting this one out.

Register For Minyanville's Holiday Festivus '09 Here
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos