CarMax to Grow on Store Expansion and Share Repurchase - Analyst Blog

On Nov 7, 2014, we issued an updated research report on CarMax Inc. (KMX). This Zacks Rank #3 (Hold) stock reported a negative surprise of 4.48% in the last quarter.

CarMax posted earnings per share of 64 cents in the second quarter of fiscal 2015, ended Aug 31, 2014, highlighting an increase of 3.2% from 62 cents a year ago. However, earnings missed the Zacks Consensus Estimate of 67 cents.

CarMax is more focused on the used-car market, which helps it outperform others in the industry. It is among the strongest operators in its peer group, which includes AutoNation Inc. (AN) and Penske Automotive Group, Inc. (PAG).

CarMax pursues an aggressive store-growth policy, driven by improvements in the U.S. sales environment. During the first half of fiscal 2015, the company opened eight stores, out of which, six stores were opened in new markets.

The company intends to open 13 used-car superstores in fiscal 2015 and 10–15 superstores in each of the next two fiscal years. As of Oct 22, 2014, the company operated 141 used-car superstores across 71 markets.

In addition, CarMax consistently enhances shareholder value through buybacks. During the first half of fiscal 2015, CarMax spent $375.1 million to buy back 7.8 million shares under its existing share repurchase program. In Oct 2014, the company also approved a $2 billion addition to its share repurchase program. The expanded authorization will expire on Dec 31, 2016.

However, incentives on new cars have encouraged consumers to trade in their old cars for new. This has lowered used-car sales and increased the used-car inventory. In addition, the used-car market in the U.S. is highly fragmented and competitive, with the presence of several new- and used-car dealers along with private individuals who are also engaged in the business. The use of the Internet for marketing vehicles is also likely to adversely affect the financials of the company.

Investors interested in automobile stocks can also consider O'Reilly Automotive Inc. (ORLY), which carries a Zacks Rank #2 (Buy).