Maximize Returns: Consider CarMax If Support Holds

Sep.30.13 | About: CarMax Group (KMX)

By Neal Rau

CarMax, Inc (KMX), the nation's largest retailer of used cars, is benefiting from very strong U.S. auto sales, and just posted fourth straight quarter of double-digit sales and earnings growth. The auto retailer's unique business model allows it to sell cars at a premium without having to negotiate on prices with its customers. CarMax is in the early stages of a multiple year expansion, and currently only has about a 3% market share, but after the recent pullback, is KMX still a buy?

Nationwide, sales of new cars rose 17% in August, and posted near record sales of over 16 million new cars, which was the fastest pace since December 2007. While new car sales have driven much of the growth, dealers also have benefited from a bigger focus on used car sales to cost-conscious buyers. CarMax's business showed substantial strength in the first 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. The stock made a 52-week high in early September, but has recently pulled back after a downgrade from Goldman Sachs Group Inc (GS), but according to the Stock Traders Daily real-time trading report, the stock is near a test of support, which might provide a good entry point. If we buy near support we can take advantage of the entire channel, using resistance as our sell signal, maximizing returns in the process, but there is more to observe.

CarMax reported Q2 in August, posting earnings of $0.62 per share, $0.06 better than the consensus estimate of $0.56, and revenues rose 17.7% YOY. Total used vehicle unit sales grew 21% and comparable store used units grew 16% versus the prior year's second quarter. Comparable store used unit sales benefited from improved execution in stores and an improved consumer credit environment. As the economic environment looks positive going into 2014, the company is looking to expand by adding stores and hiring new employees.

CarMax has been one of FORTUNE magazine's "100 Best Companies to Work For" for nine consecutive years, and currently the company is recruiting for more than 1,000 positions in locations across the country. In addition to an improving economy, the company also stands to benefit from an aging fleet of cars on the road. The average age of cars is 11.5 years, according to industry estimates, which is well above the average of nine years established a few years ago. Considering CarMax averaged 10 cars sold per day from every single dealership in 2012, and with such a small market share, an expansion into new markets could result in a very positive 2014 for shareholders.

CarMax has outperformed other automotive retailers because of its focus on newer used vehicles, which range from almost new to six years old. In the last fiscal year, 87% of cars the company sold represented that range. Many cost conscious consumers want to avoid that instant drop in value as you drive a new car off the lot. AutoNation, Inc. (AN), who also sell new cars, reported new car revenue double that of used car sales. However, one notable risk with AutoNation is the fact that the company generates nearly half of its revenue from California and Florida, two high cost-of-living states with still concerning housing markets.

Currently, CarMax is only in 50% of U.S. markets and is only in the first of its three-year growth plan, as it hopes to create 10-15 new stores each year. The stock is near a test of support, as defined in the real time trading report published by Stock Traders Daily. As a rule, we are buyers near support, and as long as the stock remains above support we expect higher levels and a test of resistance. However, support also acts as our risk control, and if support breaks lower, the otherwise positive bias that exists now would dissolve, and sell signals would surface.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Neal Rau for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.