CarMax Earnings: An Early Look

Spring is finally here, and a new earnings season is right around the corner. On Wednesday, CarMax (KMX -1.49%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

In an industry where finding the car you really want can be a nearly impossible challenge, CarMax sought out to make car-buying a lot easier. Initially focusing on used cars, CarMax now offers both new and used vehicles of all makes and models at one store. Let's take an early look at what's been happening with CarMax over the past quarter and what we're likely to see in its quarterly report on Wednesday.

Stats on CarMax

Source: Yahoo! Finance.

Will CarMax drive higher this quarter?
Analysts have been guardedly optimistic about CarMax in recent months, having raised their estimates for the just-ended quarter by a penny per share. Although they've kept their fiscal 2013 and 2014 consensus stable, the stock has responded positively, jumping more than 10% since the beginning of the year.

For years, CarMax has been dealing with a challenging environment for used cars. During the recession, the government's Cash for Clunkers program took a lot of used-car inventory off the market, leading to higher prices for used cars and thereby sending CarMax's sales plunging in 2009. Moreover, car owners held onto their vehicles longer, temporarily delaying sales for car dealers.

But more recently, conditions have started to turn in the industry. The recovery has accelerated somewhat, and strong sales of new autos have trickled down to the used-car market as well. Both CarMax and rival AutoNation (AN 0.54%) have notched new all-time highs, as those who put off car purchases have finally started to have to deal with the reality of aging vehicles costing more than they're worth to maintain.

Still, competition is fierce in the dealership area. AutoNation is moving forward with plans to create a unified brand, giving up what used to be locally named dealerships in favor of a more concentrated marketing approach. Moreover, even Costco (COST -0.12%) has gotten involved in the car-selling business, offering an online research tool that will help facilitate contact between customers and Costco-approved dealers at a pre-negotiated price. Given how much of CarMax's appeal is its no-haggle policy, rival programs with the same benefits pose a true threat.

In CarMax's quarterly report, look closely at the company's latest sales figures. They'll be valuable not just for investors in the stock but also as a general gauge of used-car sales activity throughout the country. If weak sales surprise investors, it could be one more sign that the economic recovery is on shaky ground.

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