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Company Highlights

CarMax (NYSE: KMX) is the nation's largest retailer of used vehicles. It operates in two segments, CarMax sales operations and CarMax auto finance. The stock closed yesterday's trading session at $48.31. In the past year, the stock has hit a 52-week low of $29.80 and a 52-week high of $52.47. KMX has a market cap of $10.79 billion and is part of the Services sector, Auto Dealership industry.

Current performance

CarMax reported revenues for the second quarter ending August 31 of $3,246 million, up from $2,758 million for the same quarter last year. KMX has recorded an increase in revenue in Used Vehicles of 21% (comparable store sales increased by 16%), Wholesale Vehicles of 10%, and Other Sales and Revenue of 5%, and New Vehicles segment stayed nearly the same in comparison to the 2nd quarter last year. The Used Vehicles segment, benefited mostly from improved execution at the stores, the favorable consumer credit environment, and a modest increase in store traffic. The Wholesale vehicles segment benefited from growth in the number of stores and the appraised buy rate. Net earnings were $140.3 million, or 63 cents basic earnings per share, for the quarter that ended August 31, up from $111.6 million, 49 cents basic earnings per share for the 2nd quarter last year.

Company Comparable Analysis

For this comparison I used AutoNation Inc. (NYSE:AN), Penske Automotive Group, Inc. (NYSE:PAG), and the Auto Dealership Industry averages.

Market Cap

P/E

P/S

P/B

Gross Margin (TTM)

Operating Margin

Qrtly. Revenue Growth(yoy)

Dividend Yield

KMX

10.79B

22.71

0.88

3.39

0.16

0.07

0.18

N/A

AN

6.18B

18.6

0.37

3.28

0.16

0.04

0.13

N/A

PAG

3.96B

18.95

0.29

2.93

0.15

0.03

0.12

1.30%

Industry

1.71B

18.95

1.3

6.6

0.16

0.05

0.05

1.40%

What is observable from the above table is that KMX is trading at higher valuation ratios (PE, PS, and PB) than the competitors. Why investors are willing to pay higher price? First of all the gross margin is identical for all at around 16%, and this is because of the nature of the industry. Nobody would buy an old Ford for a higher price than the next used vehicles dealer. However, the operating margin is much better than the competitors. The lower cost model, i.e. company's ability to squeeze out more earnings out of revenues is one reason why investors pay the premium. And another obvious reason is the growth of the company, which is much higher than the industry average and the closest rivals.

Turning to management efficiency and effectiveness gives us another clue about the reasons for the higher valuation ratios.

ROE

ROA

Receivables Turnover

Inventory Turnover

KMX

15.94%

5.18%

153.7

8.11

AN

19.83%

6.30%

71.85

5.96

PAG

16.80%

4.78%

27.46

5.85

Industry

14.60%

N/A

29.16

21.83

ROE is below the main peers, but still above the industry average, and ROA is second best from the three companies taken for this comparison. However, receivables turnover and inventory turnover are superior for KMX. Inventory turnover is of particular interest, since what matters in this industry is how many vehicles you will be able to sell so you can spread your overheads more thinly and end up with higher profit at the end of the day. And as can be seen from the table above, in that segment KMX is trumping the competition.

The financial strength of the company is another factor for investors' trust in this stock.

Quick ratio

Current ratio

Debt to Equity

Interest coverage

KMX

1.53

3.4

222.15

30.26

AN

0.26

1.03

145.6

5.1

PAG

0.24

0.99

232.82

6.96

Industry

1.88

2.08

20.82

10.66

KMX has better financial strength ratios (except the higher debt/equity ratio than AutoNation), than the competition. Especially reassuring is the good interest coverage ratio of the company, since it is a highly leveraged one. Despite the high indebtedness, the company is able to service its obligation out of its earnings without any problem.

Growth

KMX EPS for the last 5 fiscal years is presented below. The red figures are forecasted EPS for the next two quarters.

Earnings per Share

FY2014

FY2013

FY2012

FY2011

FY2010

FY2009

Q1

$ 0.64

$ 0.52

$ 0.54

$ 0.44

$ 0.13

$ 0.13

Q2

$ 0.62

$ 0.48

$ 0.49

$ 0.48

$ 0.46

$ 0.07

Q3

$ 0.48

$ 0.41

$ 0.35

$ 0.36

$ 0.33

$ (0.10)

Q4

$ 0.53

$ 0.46

$ 0.41

$ 0.37

$ 0.32

$ 0.17

Total

$ 2.27

$ 1.87

$ 1.79

$ 1.65

$ 1.24

$ 0.27

KMX is clearly doing something very right since it is able to continually increase its EPS year over year, and quarter after quarter. Last 5 years growth is 17.93%, and the last quarter, Q2 of this year, versus the same quarter last year has shown growth of 29.17%. Long-term growth of the company as per Reuters is expected to average around 13%. With the current plans of the company to open 17 stores in the next 12 months and to open between 10 and 15 stores per year in the next 2 years, this growth is very achievable. Moreover, CarMax currently has only 2% market share and this is expected to triple over the next 10 years (source: CNBC).

Conclusions

The company is having an advantage of full range of services including auto finance, service and repair, and wholesale auction. CarMax, as said previously, has only 2% of the sales within the automotive industry. The company is currently operating 123 stores in 61 markets, and has growth plans to open 10-15 stores each year in the next 2 years. These facts and the fact that it is already the largest national dealer of used cars, are ensuring that the company will continue its growth story. What scale brings in this business is the cost efficiency. And cost efficiency brings advantage over competition in selling the car faster, giving better financing and warranty terms, which in turn results in satisfied customers and enhanced brand value.

Moreover, with the current cost wary US customer, who will rather buy a 3-year-old car, rather than a new one whose price will rapidly deteriorate, CarMax is well positioned to reap the benefits.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: CarMax Exhibits Growth, Cost Efficiency And Operational Superiority