CarMax Hits the Skids

Peering into the crystal ball is never an easy proposition, not even when you own the ball. Take the case of CarMax (NYSE: KMX  ) . When my Foolish colleague Rich Smith wrote his last roundup, he was marveling at the way the firm had bounced back from a prediction of negative comps. On word of the same sales upgrade, the stock began a 50% run in the space of a couple months.

Then came today's sales announcement, which brings us back to where we were, namely at the bottom end of the guidance range. Overall, revenues were up 13% for the quarter, to $1.22 billion. Unfortunately, the 2% comps growth didn't do much to cheer investors on an otherwise red day for Wall Street. Earnings were predicted to come in at $0.16 per share -- excluding a one-time adjustment -- below what analysts were predicting.

While this still looks like a strong company, prospective investors need to take heed. It remains to be seen whether the car-sales woes at GM (NYSE: GM  ) and Ford (NYSE: F  ) can translate into sustainable sales growth for CarMax. The action at DaimlerChrysler (NYSE: DCX  ) and some of the Japanese automakers suggests that Americans are still willing to buy new but that predicting what they want isn't so easy.

In an era of easy credit, is it smart to bet on the used market? While it's fine to see CarMax put up low-teen sales gains, it's tough to do that forever when you have to fund it through new locations. In his peek at CarMax and its competition, Rich pointed out that neither it nor competitors such as America's Car-Mart (Nasdaq: CRMT  ) or Auto Nation (NYSE: AN  ) are priced for those who like free cash flow.

On the other hand, a sterling brand and 16% broader selling base may jump-start future revenues, should rising interest rates ever strike the new car market with any real force.

For related Foolishness:

• You can never tell whether CarMax will gun it or stall out.
• See why it's no holiday season for the automakers.
• Meanwhile, the competition's getting faster.
• Get advice on buying and maintaining a car from helpful Fools. (Free trial required.)

Seth Jayson is hoping to find a tricked-out minivan at CarMax one of these days. At the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.