So long, cash for clunkers. We hardly knew ye.
One month after the government's ballyhooed "Car Allowance Rebate System" (CARS) ended, the number crunching has begun. Winners are starting to emerge. And one of the biggest reported earnings just this morning.
CarMax is no clunker
CarMax (NYSE:KMX) shares soared on the wings of a major earnings beat this morning:
- Sales rose 13%, to $2.1 billion.
- Comps grew 8%.
- Earnings per share simply exploded -- up more than sevenfold to $0.46 per share.
But how much of this was actually due to CARS? CEO Tom Folliard attributed a "spike in traffic in late July and August" to the program. Yet while CarMax hawks new jalopies at some of its shops, the company has always focused more on selling high-quality, recent-year model used cars. And here, CarMax really shined.
I mean, you'd expect that with so many people busily trading in clunkers for new cars, used car sales would take a hit, right? Far from it. In fact, CarMax says unit sales of used cars leapt 10% in Q2. And wholesaling of used cars increased 5% by unit volume as well.
What's the frequency, Kenneth?
So what's behind the strength in used car sales? I've got a hunch (but only a hunch.)
We all know about the robbing-Peter-to-pay-Paul paradigm in car sales. When major manufacturers like GM and Ford (NYSE:F) overproduce and underprice with their "incentive programs," they pull into the present those car sales that would otherwise occur in future years. But lately we've seen both Detroit and Tokyo -- Toyota (NYSE:TM), Honda (NYSE:HMC), and Nissan (OTC: NSANY) -- scaling back production and cutting new car supply. (Even Harley-Davidson's (NYSE:HOG) seems to have learned its lesson.)
Logically, all this should increase the value of used vehicles already on the market. And CarMax confirms at least the latter half of this equation, noting a "continued appreciation in used car wholesale values since January 2009." And so far, CarMax is reaping the benefits.
Foolish takeaway
The longer the automakers coast, the better things will be for CarMax and peers like America's Car-Mart (NASDAQ:CRMT). On the other hand, if manufacturers get overconfident and hit the gas again, CarMax could stall. Stay alert.
What do the people who recommended CarMax think of its latest news? Take Motley Fool Inside Value for a free test drive and find out.
