Is CarMax Growing or Dying?

When CarMax reports this Friday we'll know if it's growing, and fending off competitors like AutoNation.

Jun 16, 2014 at 4:27PM

Auto sales giant CarMax (NYSE:KMX) reports first quarter earnings this Friday. Do you need to know if the quarter is a no-haggle success, or a sour deal? You've come to the right place. 

Here's a preview for this Friday's results.  

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Source: Ildar Sagdejev via Wikimedia Commons.

Tune out the noise
If you own shares of CarMax you've experienced some pain in recent quarters, because the stock sold off following its two most recent quarters and is still stuck in neutral. The business has performed far better than the stock price, however. It's very important to remember the difference between those two things. 

Last quarter, for instance, sales were up 9% year over year, and full-year sales were up 15%. Further, the company reported full-year net income growth of 13%. So why did the stock sell off following these results?

The short answer, is that the stock market can be pretty short-sighted. The company sold off because it missed analysts near-term expectations. For whatever reason, investors continue to place a lot of value in whether a company hits analysts guesses, despite their spotty track record. 

Analysts are expecting CarMax to report earnings of $0.67 on Friday (vs. $0.64 last year). It would be nice if the company hit that figure, because we want earnings growth, but the company could still be doing well even if it misses this (somewhat) arbitrary target. 

Comparison shopping
According to research firm Polk, the average age of all U.S. autos is 11.4 years, and it's expected to grow 20% by 2018. This figure, mixed with a thriftier consumer, bodes well for used car sales. CarMax's "no haggle" sales approach should help it win market share over more "seedy" competitors, but what about AutoNation (NYSE:AN)?  AutoNation has a large number of super stores, and promises a "hassle free" experience as well, so what makes CarMax so special?

That's the question investors need to ask. AutoNation just reported its best May sales results ever, a 15% gain, and its earnings rose 16% in its last quarter. In short, its doing very well. While it is likely that both businesses will continue doing well, investors should look at these results and wonder if there's a better deal offered at the (very similar) AutoNation. 

As it turns out AutoNation is slightly cheaper on a price-to-sales, and price-to-earnings basis.

AN PE Ratio (TTM) Chart

AN P/E Ratio (TTM) data by YCharts

CarMax is a good business and, I believe, its brand is more synonymous with the "no haggle" experience than any competitors. It also has a smaller base of stores, so it may have more room to grow. With that said, you should track its performance against its competitors, and not in a vacuum. 

In its last quarter CarMax had a 7% jump in comparable sales, here's hoping we get a similar figure. CarMax is in growth mode at the moment, but its Super Stores are large and incredibly capital intensive. The only way it can continue its growth is if same-store sales stay positive.

Growing?
When a business is growing fast, and has big expectations, it cannot "muddle along." If it's not growing, then it can't justify its valuation. With that said, we shouldn't mistake the last two quarterly "misses" as an example of CarMax dying. Keep focusing on the underlying business, if it keeps growing like the past two quarter's that is more than enough. 

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Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends CarMax. The Motley Fool owns shares of CarMax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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