Other companies, like AutoNation Inc (AN), Group 1 Automotive (GPI), Penske Automotive Group (PAG) and Sonic Automotive (SAH), have tried to mimic CarMax's business model in the past and failed, leading us to believe the company has carved out a competitive moat. This leg up on the competition will allow CarMax to expand profitably once macroeconomic conditions improve.
In 2010, U.S. light vehicle sales volume rebounded 11%, to nearly 11.6 million. For the automotive retailers sub-industry, S&P believes that the bottom has been reached in the current sales cycle. We agree, and place a price target of $37 on the stock, which offers significant capital appreciation.CarMax currently operates 104 used car superstores in 50 markets.
For interested buyers, we suggest a covered call strategy. We like the July and October 2011 sold calls and January 2012 sold calls. These permit 7-8% appreciation over one to seven months, and a synthetic yield of 2% in one month to 12% in seven months, respectively.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.