CarMax Kicks It Into Overdrive

By Rich Smith (TMF Ditty)
September 22, 2009 | Comments (4)

Recs

2

So long, cash for clunkers. We hardly knew ye.

One month after the government's ballyhooed "Car Allowance Rebate System" (CARS) ended, the number crunching has begun. Winners are starting to emerge. And one of the biggest reported earnings just this morning.

CarMax is no clunker
CarMax (NYSE: KMX) shares soared on the wings of a major earnings beat this morning:

  • Sales rose 13%, to $2.1 billion.
  • Comps grew 8%.
  • Earnings per share simply exploded -- up more than sevenfold to $0.46 per share.

But how much of this was actually due to CARS? CEO Tom Folliard attributed a "spike in traffic in late July and August" to the program. Yet while CarMax hawks new jalopies at some of its shops, the company has always focused more on selling high-quality, recent-year model used cars. And here, CarMax really shined.

I mean, you'd expect that with so many people busily trading in clunkers for new cars, used car sales would take a hit, right? Far from it. In fact, CarMax says unit sales of used cars leapt 10% in Q2. And wholesaling of used cars increased 5% by unit volume as well.

What's the frequency, Kenneth?
So what's behind the strength in used car sales? I've got a hunch (but only a hunch.)

We all know about the robbing-Peter-to-pay-Paul paradigm in car sales. When major manufacturers like GM and Ford (NYSE: F) overproduce and underprice with their "incentive programs," they pull into the present those car sales that would otherwise occur in future years. But lately we've seen both Detroit and Tokyo -- Toyota (NYSE: TM), Honda (NYSE: HMC), and Nissan (OTC: NSANY) -- scaling back production and cutting new car supply. (Even Harley-Davidson's (NYSE: HOG) seems to have learned its lesson.)

Logically, all this should increase the value of used vehicles already on the market. And CarMax confirms at least the latter half of this equation, noting a "continued appreciation in used car wholesale values since January 2009." And so far, CarMax is reaping the benefits.

Foolish takeaway
The longer the automakers coast, the better things will be for CarMax and peers like America's Car-Mart (Nasdaq: CRMT). On the other hand, if manufacturers get overconfident and hit the gas again, CarMax could stall. Stay alert.

What do the people who recommended CarMax think of its latest news? Take Motley Fool Inside Value for a free test drive and find out.

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CarMax is a Motley Fool Inside Value pick. Nissan Motor is a Global Gains selection. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Smith owns shares of CarMax. The Motley Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 22, 2009, at 6:08 PM, plange01 wrote:

    its time to sell carmax...

  • Report this Comment On September 23, 2009, at 11:39 AM, Fool wrote:

    I don't think so. Even with the Big 3 successful KMX has always been pretty steady. I think i will wait until next fall unless something really goes nuts like an internal money scandal.

  • Report this Comment On September 23, 2009, at 1:06 PM, deadlysaber wrote:

    "This is the time you have been waiting for", reports Greg Gilmore in the June 2005 issue of Dealer Magazine.

    Dealer Executive reported that last year (2004) ranked as the 4th best for new unit sales by franchised new-vehicle dealers. Total dealership dollars exceeded $714 billion, up more than 2% from 2003.

    The fact is that anytime is the right time. In 1991, in the depths of an automotive depression, John Elway asked me, prior to signing his purchase contract, if "this" (1991) was the right time to buy. I told him that it is how you buy it and how you sell it that count. That year he made a $20 million investment. At the time he had a single Mazda store on Arapahoe Road, in Englewood. I sold the Mazda franchise for him and Nissan gave him its franchise to put in the old Mazda building. Shortly thereafter, I put together another transaction that had John buy the Mazda store on 104th Avenue, in Thornton. John then terminated Suzuki and put the Mazda store with his Oldsmobile and Hyundai franchises. After that he bought one more dealership (a Ford franchise) and then, in 1995, sold the entire package to Republic Industries for $86 million.

    A lot of people were afraid to buy a dealership in 1991 and thought that John took a big gamble. But, he didn't "gamble". He structured his purchases and sales correctly, and then capitalized on his investment.

    For example, although GM and Ford lost money (as they did in 1991), individual dealers made millions, according to NADA (National Automobile Dealers Association) and Automotive News statistics, the average dealers' pretax margin varies between one and two percent of their total sales. Why? The dealers capture a broader business base than the manufacturer. While the manufacturer makes its money on new car sales, the dealers have the additional balance of the parts departments, service departments, used car departments, finance departments, insurance departments and, in some instances, body shops. Consequently, while the manufacturer is dependent upon each year's new car sales, a dealer's success is based more on the total number of vehicles in operation.

    ----------------------------------

    Money without intelligence is like a car without a road.

    http://www.intelligentinvestingtips.com

  • Report this Comment On October 01, 2009, at 9:47 AM, bukaka wrote:

    Dudes! Get ready here it comes!

    The Bubble is popping

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