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Quality and Good Prices Are the Foundations of Expansion Plans for CarMax

April 07, 2014 | About:
Victor Selva

Victor Selva

9 followers

CarMax Inc. (KMX) is engaged as a retailer of used vehicles. The company operates in two segments: CarMax Sales Operations, which consist of auto merchandising and service operations, excluding financing provided by CarMax AutoFinance (CAF); and CAF, which consists of finance operation that provides vehicle financing to customers through its superstores. Let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.

Aggressive Store Growth Policy

At Feb. 2013, CarMax operated 68 production superstores, 50 non-production superstores and four new car franchises. During the first nine months of fiscal 2014, the company opened eight stores, bringing the superstore count to 126. One more, totalizing five stores, were in new markets, helping the company penetrate Harrisonburg, Va.; Jackson, Tenn.; St. Louis, Mo.; and the Savannah and Columbus markets in Georgia. After November 2013, the company opened two stores in Philadelphia, Pa. and one each in St. Louis, Mo., Frederick, Md., and Sacramento, Calif. The expansion plan will continue in both fiscal 2015 and 2016, years in which the firm intends to open 10 to 15 superstores, apart from the 13 in 2013.

Share Buybacks

The board of directors has approved a $500 million extension of its existing share repurchase program. This extension is in addition to the previously announced $300 million repurchase authorization approved in October 2012. This $500 million authorization expires on Dec. 31, 2014. In fiscal 2013, the company repurchased 5.8 million shares for $211.9 million. During the first nine months of fiscal 2014, it repurchased 4.3 million shares of its common stock for $196.7 million. As of Nov. 30, 2013, the company had $400 million shares remaining under the program.

Analyst Recommendation

The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral.” A Hold rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 10.56%, which is very similar to the one projected for the S&P 500.

P/E, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 21.7x, a premium compared to the industry mean. Earnings per share (EPS) increased by 14.6% in the most recent quarter compared to the same quarter a year ago, to $0.47 per share for the third quarter of fiscal 2014, but missing the Zacks Consensus Estimate by a penny. We include in the next graph the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance makes the stock appealing with an upward trend over the last five years.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased when compared to the same quarter one year prior. Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

KMX

CarMax

14.38

AAP

Advance Auto Parts Inc.

25.84

PBY

Pep Boys - Manny, Moe & Jack

2.38

As we can see, the firm has a higher ROE than Pep Boys - Manny, Moe & Jack (PBY) but lower than Advance Auto Parts Inc. (AAP).

Final Comment

CarMax is a member of the Fortune 500 and the S&P 500, and one of the Fortune “100 Best Companies to Work For,” for nine consecutive years, and offers good value in terms of prices and quality compared to competitors.

According to Yahoo! Finance, the estimated one-year target share price is $52.92, so if you buy shares at current market price ($45.56), your return from price appreciation would be 16.2%, which is the total expected return for investing in the stock because there are no dividends payments.

I would recommend investors add Baxter to their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Bill Frels (Trades, Portfolio), Chuck Akre (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) have bought the stock, while Ron Baron (Trades, Portfolio) and RS Investment Management (Trades, Portfolio) have added it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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