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Stocks were little changed on Tuesday as investors weighed a disappointing outlook from the nation's largest home-improvement retail store, Home Depot Inc. (NYSE:HD), against better-than-expected earnings at discount-retail giants Wal-Mart Stores Inc. (NYSE:WMT) and Target Corp. (NYSE:TGT). This disparity led us to look for opportunities within the retail arena, where we found used-car retailer CarMax, Inc. (NYSE:KMX) on the Reuters Select Quality screen for Fastest Turnover.

The retail sector is comprised of various industries, including apparel retailers, department & discount stores, catalog & mail order retailers, home-improvement stores, specialty retailers, and technology retailers. Out of the nearly 8,900 stocks in the company universe, 266 fit into these industries. We omitted grocery stores and drugstores, as these companies focus on products that are less susceptible to fluctuations in consumer spending: Your income might rise or fall, but you still need to eat and take medicine, versus buying a new DVD player or shirt.

We started off by filtering our list of 266 stocks for only those that registered recently on a Reuters Select stock screen. This took our list down to 17 names. (Click here for an Excel sheet comparing these companies.)

Given recent dynamics in the retail arena, our first step was to filter for companies that have been growing relatively quickly. As a result, we screened for the firms where revenue and earnings per share [EPS] growth over the trailing 12 months [TTM] is faster than the respective industry average. This shortened our list to only six names.

Next, we want to see some improvement in growth. So, we honed in on companies whose TTM pace of growth is faster than the company's own five-year average for both revenue and EPS. This shortened our list to only two names: CarMax, Inc. and Coldwater Creek Inc. (CWTR).

Growth Rates(%) KMX Industry CWTR Industry
Sales [TTM] vs TTM 1 Yr. Ago 17..83 15.79 36.00 11.56
Sales - 5 Yr. Growth Rate 17.81 21.95 11.20 10.81
EPS [TTM] vs TTM 1 Yr. Ago 44.06 11.83 44.41 19.82
EPS - 5 Yr. Growth Rate 25.63 39.42 22.45 19.74

Wanting the stock with the cheapest price tag, we then turned our attention to valuation and filtered for the company that had a price to earnings (P/E) multiple below the industry average. This is where CarMax crossed the finish line first. As indicated below, not only does it have a lower P/E, it is also priced at a discount to the industry on the basis of two other key metrics, P/Sales and P/Tangible Book Value.

Valuation Ratios KMX Industry
P/E Ratio [TTM] 28.30 30.51
P/E High - Last 5 Yrs. 39.99 44.92
P/E Low - Last 5 Yrs. 16.21 20.40
Beta 1.59 1.33
Price to Sales [TTM] 0.73 2.65
Price to Book [MRQ] 4.43 4.13
Price to Tangible Book [MRQ] 4.44 8.27
Price to Cash Flow [TTM] 24.03 20.48
Price to Free Cash Flow [TTM] NM 35.81
% Owned Institutions 87.12 71.42

When analyzing companies, investors often focus on a measure of efficiency, such as profit margins. However, some industries are more competitive than others, and profit margins get squeezed to razor-thin levels. In these industries, it is more useful to look at measures of how fast companies get the products off the shelves and out the door. The faster the level of product turnover, the higher is the company's revenue and earnings, even with the thin margins. With such companies, it is important to also pay attention to measures of management effectiveness, such as return on investment [ROI]. ROI provides some insight as to how effective management is at using available capital; it is calculated as net income divided by shareholder equity, long-term debt and all other long-term liabilities. The Fastest Turnover screen is designed to highlight companies with superior turnover and ROI.

The screen begins by requiring that a company's receivables, inventory, and asset turnover readings must be at least 25 percent superior to the industry averages. As indicated below, CarMax satisfies this criterion.

Efficiency CarMax Industry
Receivable Turnover [TTM] 103.21 26.23
Inventory Turnover [TTM] 9.06 6.39
Asset Turnover [TTM] 4.60 1.95

The screen then turns to management effectiveness statistics and requires that a company's five-year average ROI must stand above the industry mean. CarMax has outperformed the industry in terms of ROI over the last five years, and it has maintained a relative advantage in the TTM span as well. Taking a closer look at CarMax, we find that the company towers over the industry norm according to other measures of effectiveness, as well: Its return on assets and return on equity have surpassed the industry average over both the last five years and in the TTM span.

CarMax Industry Sector S&P 500
Return on Assets [TTM] 11.92 8.86 6.35 8.24
Return on Assets - 5 Yr. Growth Rate 11.09 7.68 5.12 6.52
Return on Investment [TTM] 16.36 13.18 9.04 12.30
Return on Investment - 5 Yr. Growth Rate 15.05 11.00 7.25 10.06
Return on Equity [TTM] 17.46 14.30 14.43 20.29
Return on Equity - 5 Yr. Growth Rate 17.61 14.11 11.99 17.93

Lastly, the screen takes into consideration analyst EPS estimates: It requires that present consensus for current-year EPS must be equal to or higher than its reading from eight weeks ago. This requirement of an upward revision in earnings estimates also is well-suited for finding retail companies that are growing quickly, such as CarMax.

Over the last two months, the average of analyst EPS estimates for fiscal year ending February 2007 has climbed from $1.50 to $1.64. Analysts have also upped their estimates for fiscal 2008, erasing the $1.78 from two months ago and penciling in $1.91 currently.

At the time of publication, Erik Dellith did not own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by

Source: CarMax: Fast Earnings, Huge Turnover