Foolish Forecast: Reading CarMax's Manual

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Auto superstore CarMax (NYSE: KMX) reports its fiscal Q2 2007 numbers tomorrow morning, and investors want to know: will they have that new car smell?

What analysts say:

• Buy, sell, or waffle? Nine analysts follow CarMax. Seven of them say to hold the stock, while one each says buy and sell.
• Revenues. On average, analysts expect CarMax to report $1.85 billion in sales, up 13% from last year.
• Earnings. But just a 5% rise in profits to $0.41 per share.

What management says:
Management's most interesting SEC filing since last quarter's report was undoubtedly its investor presentation, released in late June. Therein, CarMax sketched out its plans for the current fiscal year and beyond. While we don't have space here to cover the report in detail, there are at least a few points I'd like to mention. First off: growth. CarMax has already opened four new stores out of the 11 slated to open this year. In absolute numbers, growth seems likely to accelerate, too, with CarMax targeting 15%-20% growth in its store count, every year, for the next four years. Take the midpoint of that prediction, multiply by last year's store count of 67, and by the end of fiscal 2010, we're going to be looking at a firm with 128 car-dealing superstores across the nation. In addition to that 91% growth in locations, CarMax aims for annual growth in unit sales of 6% at locations already open. Put it all together, and this firm that sold just over $6 billion in product last year hopes to sell as much as $12 billion in 2010.

What management does:
Sales, of course, are all well and good -- but what really makes investors smile is profits. All the sales growth in the world won't generate profit growth if margins are falling too fast. Fortunately, that's not a problem at CarMax. Although it's not setting any records on fire, margins have been moving steadily upwards on each of the gross, operating, and net fronts for the last 18 months.

Margins %	2/05	5/05	8/05	11/05	2/06	5/06
Gross	13.7	13.7	13.8	14	14.1	14.2
Op.	3.5	3.5	3.6	3.7	3.8	4.2
Net	2.1	2	2.1	2.2	2.3	2.5

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In the September issue of Inside Value, lead analyst Philip Durell advised our members on the subject of CarMax. At its current price -- up 48% since Philip first recommended the stock, against a 4% rise in the S&P 500 -- is the stock still cheap enough to buy? I'd love to tell you, but because the update is less than 30 days old, the Fool's rules restrict this information to "subscribers only." Of course, you can read Philip's thoughts with a free trial of the service.

For everyone else, I can only reveal what Philip had to say back in June. Specifically, he found last quarter's earnings news "particularly impressive" because of "the increase in operating profit margins ... to 5% from an average of around 4% over the last few years." Philip says this "suggests that the company is able to leverage its fixed costs, and bodes well for the future."

Competitors:

• America's Car-Mart (Nasdaq: CRMT)
• AutoNation (NYSE: AN)
• Group 1 Automotive (NYSE: GPI)
• United Auto Group (NYSE: UAG)
• Toyota (NYSE: TM) Financial Services
• Wells Fargo (NYSE: WFC) Financial Acceptance

Fool contributor Rich Smith has no interest, short or long, in any company named above.