CarMax: Running On Fumes

Jun.17.08 | About: CarMax Group (KMX)

CarMax (NYSE:KMX) is set to release earnings on June 18th, and it likely will not be pretty. There is a deep decline in new car, truck and SUV-type sales, with an extreme mix shift from SUVs and trucks to more fuel efficient cars which are new - not used.

Consumers trading down from new to late model used cars usually provide a sales cushion for the likes of CarMax and other secondary market dealers, but rapid price declines of over 15% year to year in widely owned gas guzzlers, coupled with much tougher credit, limited home equity and a weaker economy have made the consumer upside down on loans and unable or unwilling to trade into another vehicle. CarMax has had to write down inventory in a significant fashion.

Plus, new car dealers are offering almost giveaway incentives which slows traffic at the CarMax lots. Why buy old when you can buy new, if a gas guzzler is what you want?

Recent statistics have shown the widest divergence ever between retail and wholesale trends covering two years. And consumers appear to be less willing to sell their vehicles to CarMax when they learn that they will get a lot less money than expected due to market price declines.

Financially, CarMax recently completed a private placement to create liquidity. Accounting rules FAS 149 and FIN 46, as proposed now, would eliminate CarMax's ability to use gain on sale accounting practices, which would significantly impact the timing of income recognition.

Between gas prices, home equity scarcity,sharply lower auto purchasing and a glut of unwanted gas hogs on the lots, CarMax (and the industry as a whole) is suffering with no end in sight.

Trading at $18.23/share, KMX stock is close to its 52-week price range of $16.81-$27.42. With a $4b market cap, KMX is considered to be the premiere previously owned vehicle dealer in the U.S.

I believe the downward trend for KMX will remain in place, and I would not buy the stock even at this low price. In fact, I would short it anticipating a fall to slightly under $12.00/share.

Disclosure: The author holds no position in KMX.