Will CarMax Earnings Suffer From Ford and GM's Success?

CarMax (KMX -1.49%) will release its quarterly report on Tuesday, and investors don't seem nervous at all about the used-car retailer's prospects. Even though big automakers have reported huge increases in new-car sales, investors still expect growth in CarMax earnings, and the stock trades near all-time record highs.

As the nation's biggest used-car retailer, it's natural to think that CarMax might suffer as sales of new cars increase. In August, General Motors (GM 1.20%) had its best sales month since it emerged from bankruptcy, with a 22% gain in retail sales for the month stemming from popularity of its Buick and Cadillac brands as well as its Chevy Volt model. Ford (F 0.69%) showed similar strength, with a 20% retail-sales jump riding on the popularity of its F-Series pickups and its Fusion sedan. But all signs suggest that CarMax is also benefiting from the trend toward auto-buying. 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 report.

Stats on CarMax

Source: Yahoo! Finance.

Will CarMax earnings drive higher this quarter?
Analysts have gotten more optimistic about CarMax earnings, boosting their August-quarter estimates by $0.02 per share and their full-year fiscal 2014 projections by more than 3%. The stock has continued its surge, rising another 15% since mid-June.

CarMax's business showed substantial strength in its May quarter. The company's results included a 19% jump in revenue that translated into a 22% net-income gain compared to the previous-year's quarter. Those marks represented new records for sales and profits at CarMax, defying less upbeat expectations from analysts following the company.

One big competitive advantage that CarMax has emphasized is its no-haggle, all-brand approach to car sales. Because of the reputation for questionable integrity that the used-car industry has, CarMax's approach is invaluable in giving customers a greater sense of comfort in making purchases.

In addition, despite the popularity of new cars, used cars arguably still offer a better value proposition for many customers. Buying used avoids the huge depreciation you suffer driving a new car off the lot. Moreover, lower monthly payments, reduced insurance and registration costs, and sometimes less-complex parts requiring less sophisticated maintenance can weigh in used cars' favor.

However, one challenge CarMax faces is that its new-car business doesn't offer every make of vehicle, with only limited selections and only at certain stores in the Atlanta, Chicago/Milwaukee, and Baltimore/Washington areas. Its website offers cars from Chrysler, Toyota, Nissan, and Scion, but Ford and GM are conspicuously absent. That stands in stark contrast to rival dealer AutoNation (AN 0.54%). AutoNation has a much wider array of brands to choose from, although it too doesn't have every possible make and model conveniently available throughout its nationwide network.

In the CarMax earnings report, watch to see whether new-car sales are representing a bigger part of its business, and see if the company provides breakdowns of used-car models that are especially popular. If CarMax can capitalize on Ford and GM's success by selling more late-model used vehicles from those companies, profit growth could continue for a long time.

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