CarMax Earnings Preview: Marginally Higher EPS Expected

CarMax KMX is scheduled to report fiscal third-quarter 2011 results tomorrow morning, December 21. Investors will be looking for the company to demonstrate that the earnings miss in the previous quarter was a fluke. Note that short interest is up from earlier this year and now is about 8.3% of the float. The analysts' forecast calls for CarMax to report that its per-share earnings inched up a couple of pennies from the same quarter of last year to $0.38. That estimate is unchanged from 60 days ago. Looking ahead to the full-year, the forecast calls for an increase of 9.2% year over year. Note that CarMax missed EPS estimates in the previous quarter for the first time in more than eight quarters. Analysts also expect the company to report that revenues for the quarter rose 6.4% from a year ago to $2.3 billion. Full-year revenues thus far are expected to be 10.6% higher, while for the current quarter, revenues are predicted to rise 6.0%, with EPS up 7.3% year over year. The Company Richmond, Va.-based CarMax is a retailer and wholesaler of used vehicles in the United States. It also offers financing and other automotive-related products and services. The company operates more than 100 locations in 51 markets. CarMax was founded in 1993 and now is an S&P 500 component with a market cap of $6.8 billion. During the three months that ended in November, the company opened its first superstore in Massachusetts, and the CarMax Foundation celebrated making $10 million in grants. More recently, CarMax began hiring for its new location in Chattanooga, which is scheduled to open in February. Performance The company has a long-term earnings per share growth forecast of 13.7% and its return on equity is 17.7% The P/E and PEG ratios are greater than the industry average, but so is the operating margin. The consensus recommendation of analysts who follow the stock is to buy it, and they have a mean price target on shares that is more than 15% higher than the current share price. The share price is up more than 32% from a 52-week low in October but still down more than 5% since the beginning of the year. It is currently above the 50-day and 200-day moving averages. Over the past three months, the stock has outperformed competitor AutoNation AN and the S&P 500. Action Items: Bullish: Investors interested in exchange traded funds with a stake in CarMax might want to consider the following trades:

• Rydex S&P Equal Weight Consumer Discretionary RCD is about 15% higher than the 52-week low.
• PowerShares Morningstar Stock Investor Core Portfolio PYH is almost 15% higher than the 52-week low.
• PowerShares Fundamental Pure Mid Growth PXMG is more than 12% higher than the 52-week low.

Bearish: Traders may prefer to consider these alternative positions in the same sector:

• Group 1 Automotive GPI is up about 46% from the 52-week low.
• Sonic Automotive SAH is up more than 42% from the 52-week low.
• Copart CPRT is more than 28% from the 52-week low.

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