Market Overview

CarMax Earnings Preview: Higher Sales, Lower EPS Expected

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CarMax (NYSE: KMX), the used-car retailer, is scheduled to report first-quarter fiscal 2013 results on June 21, before the U.S. markets open.

The company has seen net income rise in the previous three quarters and has enjoyed four-straight quarterly revenue increases. Investors will be hoping for these trends to continue, as well as watching for how fuel prices and the woes of automakers may have affected results.

See also: Ford and GM Feeling Europe's Economic Despair

Expectations

Analysts predict that CarMax will report per-share earnings of $0.53 for the quarter and say that its revenue totaled $2.8 billion. In the same period of last year, the auto retailer reported $0.55 per share and $2.7 billion in sales. Note that the EPS estimate is one cent less that it was 60 days ago. CarMax exceeded consensus EPS estimates in the fourth quarter, but narrowly fell short in the two quarters before that. The positive surprise in the fourth quarter was one cent per share.

Back in that fourth-quarter report, the company offered up revenues of $2.5 billion and net earnings of $95 million, or $0.41 per diluted share. Both the top and bottom lines exceeded expectations. Same-store sales were up year-over-year for both the quarter and the full year. CarMax attributed the growth in sales to strong subprime financing, and also said that it expects to open 10 stores in 2012 and 10-15 stores in 2013.

See also: CarMax Q4 Beats Estimates on Strong Subprime Financing

The forecast for the current quarter has EPS and sales about the same as the first-quarter estimates, which would represent a revenue increase of 8.2% but flat earnings, compared to a year ago. So far, analysts expect fiscal 2013 per-share earnings and revenues to be up by single-digit percentages.

The Company

CarMax is primarily a retailer of used vehicles in the United States, with more than 110 locations in 55 markets. The company also sells new vehicles under franchise agreements with Chrysler, General Motors (NYSE: GM), Nissan and Toyota (NYSE: TM). It provides financing options to customers, as well as a range of other related products and services. It also sells cars to licensed dealers. CarMax was founded in 1993 and is headquartered in Richmond, Virginia. It is a component of the S&P 500 and has a market cap of $6.5 billion.

Competitors include America's Car-Mart (NASDAQ: CRMT), AutoNation (NYSE: AN) and Penske Auto Group (NYSE: PAG). In its most recent quarter report, America's Car-Mart topped consensus EPS expectations but revenues grew less than predicted. Analysts expect AutoNation and Penske to post solid EPS and sales growth when they report second-quarter results in July.

See also: AutoNation Pops as New Vehicle Sales Increase 45%

During the three months that ended in May, CarMax opened new stores in Bakersfield, California; Fort Myers, Florida; Lancaster, Pennsylvania, and other locations. It also announced that, in an effort to reduce energy consumption, it had installed solar panels in locations including Phoenix, Arizona; Irving, Texas, and Fort Worth, Texas.

Performance

CarMax's long-term earnings per share growth forecast is 12.5%. Its price-to-earnings ratio is higher than the industry average, but so is its operating margin. The return on investment is 16.8%, which is higher than those of its competitors. Short interest is 7.1% of the float. Ten of 15 analysts who follow the stock rate it a Buy or Strong Buy; none recommend selling shares. Their mean price target is more than 24% higher than the current price.

Trading near $28.50, shares are more than 6% lower than at the beginning of the year. Shares have pulled back more than 17% over the past quarter from near a 52-week high. The share price is below both the 200-day and 50-day moving averages. Over the past six months, the stock has underperformed the competitors mentioned above, as well as the broader markets.

ACTION ITEMS

Bullish: Investors interested in exchange traded funds (ETFs) invested in CarMax might want to consider the following. Over the past six months:

  • Guggenheim Sector Rotation (NYSE: XRO) is trading more than 26% higher.
  • Consumer Discretionary Select Sector SPDR (NYSE: XLY) is up nearly 17%.
  • Rydex S&P Equal Weight Consumer Discretionary (NYSE: RCD) has rallied more than 15%.
  • SPDR S&P Retail (NYSE: XRT) is up about 14%.
Bearish:

Traders may prefer to consider these alternative positions in the same industry. Over the past six months:

  • Asbury Automotive Group (NYSE: ABG) is up more than 25%.
  • KAR Auction Services (NYSE: KAR) is up about 23%.
  • Penske Automotive Group (NYSE: PAG) is up about 22%.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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