Foolish Forecast: CarMax Still Stalled

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After four straight quarters of declining profits and missed earnings estimates, is it time to sell CarMax (NYSE: KMX) for salvage? The used-car superstore reports its Q3 numbers Friday. We'll soon learn if they've learned to shift gears without grinding.

What analysts say:

• Buy, sell, or waffle? A dozen analysts still follow CarMax. Most of them agree with Warren Buffet (and Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B)) (and me) (and Motley Fool Inside Value) that the stock's worth holding, but one thinks the stock's been totaled and should be sold for scrap.
• Revenues. On average, analysts expect to see sales fall 15% to $1.6 billion.
• Earnings. Profits are expected to evaporate. CarMax may just eke through with a meager profit of $0.01 per share.

What management says:
So, consumers aren't buying cars, and CarMax isn't earning much selling cars. Is there any good news? For what it's worth, management confirmed in October that if it can find a willing buyer, that person should be able to get a car loan. Says management, "despite the continuation of difficult economic conditions, credit remains widely available for qualifying customers ... through CarMax Auto Finance (CAF) and the company’s third-party lenders, a group of leading financial institutions." Said bankers run the gamut from Bank of America (NYSE: BAC) to Capital One (NYSE: COF) and Wells Fargo (NYSE: WFC).

What management does:
While bankers are plentiful, the trick remains finding consumers interested in buying used cars. Until CarMax relearns how to attract buyers, its large installed base of superstores sits relatively idle, making few sales, but continuing to pay the gas and electric. Result: lower margins for CarMax.

Margins	5/07	8/07	11/07	2/08	5/08	8/08
Gross	14.5%	14.6%	14.4%	14.0%	13.6%	13.2%
Operating	4.4%	4.5%	4.2%	3.6%	2.9%	2.0%
Net	2.6%	2.7%	2.5%	2.2%	1.8%	1.2%

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:
Mind you, things will pick back up eventually. They have to. In a nation as car-obsessed and car-dependent as ours, where mass transit is almost as rare as it is disdained by the populace, people simply must resume buying cars at some point. The bad news for Ford (NYSE: F) and General Motors (NYSE: GM) is that these don't necessarily have to be new cars, or American cars. The good news for agnostic used-car salesmen like CarMax is that the fewer cars it sells today, the greater the pent-up demand for cars in future years.

But this demand could be a long time in coming.

Should you stick around waiting for the turnaround, or trade this stock in? Take a free trial of our Motley Fool Inside Value newsletter and get the team's latest thoughts on CarMax.