It's a tough time to be in the used-car segment. Recent data indicates that supply is outstripping demand, and that would seem to be a bad sign for CarMax (NYSE:KMX). But the used-car specialist has taken market turbulence in stride. What's more, the stars now may be aligning in the company's favor.
The past few months have been great for new car and truck buyers. Consumers have been treated to cut-rate prices and sweet financing offers thanks to the employee-pricing promotions that General Motors (NYSE:GM), Ford (NYSE:F), and DaimlerChrysler (NYSE:DCX) have been running. Not surprisingly, shoppers have come out in droves.
Record new-vehicle sales also have stacked the deck in buyers' favor in the used market. As consumers drove off with new purchases, they left old vehicles behind. Dealers had 150,000 more used cars in July 2005 compared to July 2004, according to the Chicago Tribune. With increased supply, average used-car sale prices have dropped for three months, and at the end of August were down 8% since May.
Rising supply and falling prices don't sound like positives for CarMax. But late last month, the firm raised second-quarter guidance to $0.37 per share from a range of $0.29 to $0.34. CarMax credited part of the improvement to traffic from the employee-pricing programs (CarMax sells new Chrysler and GM vehicles at some locations). The firm also noted, though, that the higher expectations reflect lessons incorporated from earlier lean periods, namely keeping appraisal offers in line with market trends and inventories aligned with sales levels.
Given CarMax's solid performance in trying times, it's reasonable to think that a more robust market could bring even better results. And just such a stronger market might be around the corner in the wake of Hurricane Katrina. Paul Taylor, chief economist of the National Automobile Dealers Association, estimates 400,000 vehicles lost in Louisiana and Mississippi will need to be replaced, and expects many former owners will opt for used vehicles. Unfortunately, CarMax does not have locations in either state, though it does have stores in states that have absorbed large numbers of refugees. And as used-car demand rises throughout the southeast as a result of Katrina, CarMax's size should give it advantages in pricing and selection compared to smaller dealers.
Unfortunately, CarMax has been known to disappoint. Nevertheless, the company's forthcoming earnings release is worth a close look.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
