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CarMax Drives Forward, but Is the Road Running Out?

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Both new and used vehicle sales are projected to push their multi-year highs this year and onward, and CarMax (NYSE: KMX  ) showed evidence with its own record sales -- but not enough to wow the ever-ambitious Wall Street. The used-car purveyor saw sales grow in the double digits, along with great unit-level sales growth and a bump in the company's financing revenues. Investors could choose to forget the earnings miss, as the industry tailwinds and store performance bode for good times to come for CarMax. For those just now looking to get in on the growing business, though, is there enough room for gains?

Revving up
Off-lease vehicles returning to market and manufacturer programs are driving the used car market up, says industry rag Automotive News. surveyed consumers and found that 55% of new-car buyers are open to looking at used cars -- as long as they're certified.

Though CarMax doesn't offer the same manufacturer used car incentives, it does have its own coverage to encourage people to buy used. In the company's third quarter, sales grew 13% to $3.94 billion. Same-store sales grew an impressive 10%, while total used unit sales jumped up by 15%.

CarMax's financing arm -- a cash-printing business -- saw its revenues rise by 16% to nearly $84 million. The company could have performed better in this segment, but customers are finding other loan providers in the market. The bottom line (on a diluted basis) kept pace, up 15% in the quarter to $0.47 per share. While that's impressive in isolation, analysts were looking for a penny more on the bottom line, and $200 million more on the top line.

Stores are leading the way in the company's growth, with a boost from an appealing consumer credit environment. CarMax opened another three superstores during the quarter.

Enough gas?
There's no denying the industry tailwinds here, and investors really shouldn't be concerned over a one-penny miss on expectations. The company is making money and will continue to grow both the top and bottom lines, as expected. The question is whether prospective investors should consider the stock at its current levels.

The market is well aware of the growth prospects for both CarMax and the industry at large -- it's valued the companies accordingly. CarMax trades at nearly 19 times forward earnings estimates and holds an EV/EBITDA  of 18.3. This keeps the stock firmly out of the purview of value-seeking investors, but it's not outrageous for growth investors who are willing to pay the premium.

Competitor AutoNation trades significantly cheaper, though it doesn't hold the margins that CarMax has, historically.

The bottom line here is basically a good one: CarMax has continued bright days ahead and existing investors shouldn't fear. For those who are willing to pay up, the stock has some juice left in it -- but it doesn't have the downside protection that its peer AutoNation offers. Keep an eye on the financing arm as management is looking to expand its portfolio. The stores will keep things moving forward, regardless.

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9/30/2016 4:06 PM
KMX $53.35 Up +1.18 +2.26%
CarMax CAPS Rating: ****