It's time for the fiscal equivalent of our 3,000-mile-or-three-month oil change, folks. CarMax
As a business, CarMax has been reviving in recent quarters, posting 39%, 15%, and 33% year-over-year increases in profit per diluted share in its three quarterly earnings reports this year. Yet there's a squeak in this jalopy that's been driving investors crazy for months now -- the stock price. Ever since the company reported its most recent profit bump, the shares have been sagging, yet for no apparent reason. Long before CEO Austin Ligon's announcement in early October that he would be leaving the company in 2006, the shares had begun sliding. Today, they sit 13% below their post-earnings release high of $31.65.
Perhaps the fear stems from the wide range of possible earnings the company alluded to in that last earnings release: $0.19 to $0.25, a range broadened by the uncertain impact of Hurricane Rita on the company's Texas operations. Out of that series of double-digit numbers -- any one of which would easily beat the $0.17 per share that the company posted one year ago -- analysts have picked $0.21 for their consensus estimate.
My fellow Fool Mike Cianciolo has a different view. Because CarMax is in the business of providing quality, low-cost, no-hassle replacement cars, he thinks that whatever damage Rita did to CarMax's operations, the profit potential from marketing its wares to the thousands of persons who lost their waterlogged rides to Hurricanes Rita and Katrina will more than offset damage to the company's locations. In short, he predicts: "CarMax to come in toward the upper end of its guidance and continue to be a strong performer overall."
I have to say that, although I didn't come up with this theory, after some reflection, I agree with it. And if Mike's right, then CarMax's "professional" analysts have set the company's investors up to benefit from an upside earnings surprise Wednesday.
Which should make the morrow's earnings release doubly interesting to Fool readers. It's a battle of polar opposites: the suits on the Street versus one lonely Fool, preaching common-sense investing and predicting banner profits from this Wal-Mart of the auto world. Who will win this time? Tune in to find out.
While you're waiting for Wednesday's tune-up, feel free to grab a cup of coffee and peruse our reading materials:
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Fool contributor Rich Smith has no position, short or long, in CarMax.