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CarMax (KMX) shares have retreated of late, with investors pushing shares from a 52-week high at $37.02 earlier this year to a price in the mid- to high 20's. Investors are overly concerned with a weak macro environment because CarMax's no-haggle business model continues to work. For the FY ended 28 February 2011, CarMax’s revenues increased 20% to $8.98 billion, and GAAP EPS rose by 32.5% to $1.67. The next earnings release is on June 22. For Q1 2012, analysts estimate that the company will earn $0.48 per share, an increase of 8.08% over Q1 2011, and generate revenues of $2.5 billion, an increase of 11.06% over Q1 2011. The company also has a debt to equity ratio of 1.8.

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.

Call Options
Expires Symbol Last Chg Vol Open Int
11-Jul KMX110716C00029000 0.7 0 5 351
11-Oct KMX111022C00029000 1.96 0 4 27
12-Jan KMX120121C00029000 3.1 0 11 11

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

Source: CarMax: Create a Synthetic Dividend From This Revving Growth Engine