Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



CarMax After Earnings: Buy, Hold, or Sell?

Source: CarMax.

CarMax (NYSE: KMX  ) fell by more than 4.2% on Friday after reporting lower-than-expected earnings for the quarter ended on Feb. 28. But the company is still performing soundly, and CarMax is a differentiated player in the car dealership business with the competitive strength to continue outgrowing competitors such as AutoNation (NYSE: AN  ) and Copart (NASDAQ: CPRT  ) in the years ahead. Is the recent dip in CarMax a buying opportunity or should investors stay away from the company?

The numbers
Earnings came in below analysts' expectations, but one-time accounting changes had a big impact during the quarter. CarMax changed its accounting for cancelation reserves, which reduced earnings per share by $0.08 during the fourth quarter of 2014. Only $0.01 of that money was related to operations during the quarter, though; adjustments to earlier quarters in fiscal 2014 accounted for $0.02 in expenses, and $0.05 per share was related to fiscal 2013 and fiscal 2012.

Adjusting for this accounting charge, earnings per share would have increased by 13% versus the prior year on the back of a healthy increase of 9% in revenues to $3.08 billion. Total used unit sales increased by 12% during the quarter, and used unit sales in comparable stores grew by 7% versus the same quarter in the prior year.

CarMax is facing challenges as subprime lenders cut back their loan originations lately, but the company is building its own loan portfolio to gain autonomy and reduce its dependency on third-party originations. CarMax plans to originate approximately $70 million in loans during the initial test, of which $9.1 million was originated in the fourth quarter of fiscal 2014.

All in all, it was a solid quarter for CarMax, especially considering that the harsh winter and a challenging environment for consumers presented considerable headwinds during the period.

A differentiated player
CarMax follows a differentiated strategy that makes the company a unique player among car dealerships. As opposed to the typical high-pressure sales tactics and often obscure sales terms used by most competitors, CarMax uses a no-haggle pricing policy, which makes the negotiation process much simpler and more comfortable for the consumer.

Sales team employees work on fixed commissions; this means they make the same commission regardless of which car the customer buys. This way, employees can focus their effort and attention on finding the best car according to customer's needs instead of trying to push the vehicles that generate higher commissions.

Judging by response to customer satisfaction surveys, clients seem to really appreciate CarMax's customer-friendly philosophy.

Source: CarMax.

This innovative approach has been quite successful for CarMax, and it has allowed the company to build additional sources of competitive strength as it gains market share versus the competition. Brand recognition, inventory variety, economies of scale, and geographical reach are other important factors differentiating CarMax from other car dealerships and positioning the company for sustained performance in the future.

Beating the competition
According to management, CarMax increased its share of the used-car market by 17% during fiscal 2014. CarMax has consistently outgrown competitors such as AutoNation and Copart over the years, and the company continues to outperform based on recent financial reports.

AutoNation announced an increase of 8% in sales during the fourth quarter of 2013 to $4.5 billion. New-vehicle sales increased by 5% on the back of a 1% increase in same-store sales, while used-vehicle sales grew 15% overall and 10% on a same-store sales basis. As for March, AutoNation reported a 6% increase in total new vehicle unit sales and a 4% growth rate in new vehicle unit sales on a same-store basis. 

Copart announced an increase of 7.6% in revenues during the quarter ended on Jan. 31 to 286.4 million during the period. Services sales grew 8.7% to $235.7 million, while vehicle sales grew by a much lower 2.9% to $50.7 million during the period.

In the mature and competitive industry of car dealerships, gaining market share versus competitors is a crucial growth driver for CarMax, and also a strong reflection of the company's unique business model and differentiated strategy.

Bottom line
CarMax's recent decline looks like no reason to worry. One-time accounting adjustments masked what would otherwise be healthy results from the company, and CarMax continues to demonstrate that its differentiated customer-friendly approach to the business generates superior performance and market share gains in an intensely competitive industry such as car dealerships. The lower the price goes, the better the opportunity.

Boost your 2014 returns with The Motley Fool's top stock
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2905251, ~/Articles/ArticleHandler.aspx, 9/4/2015 3:12:50 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

Today's Market

updated Moments ago Sponsored by:
DOW 16,065.33 -309.43 -1.89%
S&P 500 1,919.88 -31.25 -1.60%
NASD 4,672.06 -61.44 -1.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 2:57 PM
KMX $59.87 Down -0.71 -1.17%
CarMax CAPS Rating: *****
AN $57.38 Down -0.53 -0.92%
AutoNation, Inc. CAPS Rating: ****
CPRT $34.70 Down -0.17 -0.49%
Copart CAPS Rating: *****