Used and wholesale car dealership CarMax (KMX) reported wonderful results for its fiscal year 2013 fourth quarter. Revenue surged 14% year-over-year to $2.8 billion, easily exceeding consensus estimates. Earnings per share rose 12% year-over-year to $0.46, in line with consensus expectations.
With all of the hoopla surrounding new car purchases, CarMax continues to dominate the used car market. Comparable-store unit sales increased 6% during the quarter, while total used unit sales jumped 12%. Average sales prices increased 4% year-over-year to $19,287, benefiting from increased market share in the 0-6 year old car market as well as constrained used vehicle supply. The stunning resiliency of used car prices indicates the robust level of demand for car upgrades in the United States. Fortunately for OEMs like Ford (F) and GM (GM), higher used car prices help new car prices look more attractive, especially when warranties, servicing, and other incentives are factored in to the cost of ownership.
Even though CarMax benefited from stronger pricing and volumes, profit per used car unit actually declined 40 basis points to 11%, though unit profitability remains up $6 on an absolute basis. This can be attributed mostly to higher costs of purchasing newer used cars, in our view.
CarMax also posted solid results in its wholesale business, with unit sales jumping 6% during the fourth quarter to 78,720 vehicles. Realized prices on these vehicles rose approximately 1%, leading gross profit in the segment to increase 10% to $78 million. Wholesale had been weak for most of fiscal year 2013, but CarMax's fourth quarter results suggest some return to growth.
Income from CarMax's financing arm jumped 15% during the fourth quarter to $76 million, while it grew 14% for the full-year to $299 million. In spite of a bad label obtained from the housing crisis, sub-prime lending, particularly that of the auto variety can be a highly profitable business. If a borrower fails to pay his or her mortgage, the borrower can live in the house for a considerable amount of time. On the other hand, if a borrower doesn't pay his or her car note, the lender repossesses the car. Because losing the car can be even more devastating than losing a house (particularly in non-urban areas), people generally make car payments in lieu of others. This creates a robust securitization market so the financing arms of CarMax, Ford, and the like can easily transfer the credit risk to others. As financing becomes looser, we anticipate lending and securitization activity to increase, which could provide a nice boost to CarMax's income.
Looking ahead, CarMax intends to open 12 new supercenter stores in fiscal year 2014, making a big jump into St. Louis, and Philadelphia. We think 2014 will be another strong year for the used car seller, but we believe shares look fairly valued at this time. In the event of a substantial pullback, we would consider adding shares to the portfolio of our Best Ideas Newsletter.
Additional disclosure: Valuentum holds shares of Ford in its Best Ideas Newsletter portfolio.