CarMax (KMX) Gains from Store Openings and Share Buybacks - Analyst Blog

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On Aug 13, 2014, we issued an updated research report on CarMax Inc. ( KMX ). This Zacks Rank #2 (Buy) stock reported a 15.15% positive earnings surprise in the last reported quarter.

CarMax posted earnings per share of 76 cents in the first quarter of fiscal 2015 (ended May 31, 2014), exhibiting an 18.8% improvement from 64 cents a year ago. Earnings also surpassed the Zacks Consensus Estimate of 66 cents.

Unlike its peers, CarMax focuses more on the used-car market, which helps it to outperform the industry. Moreover, it rapidly increases its store count to boost sales. During the first quarter of fiscal 2015, CarMax opened four stores. Out of the total, three stores were opened in new markets - Rochester, NY; Dothan, AL; and Spokane, WA. Subsequent to the end of the first quarter, the company opened its first store in Madison, WI.

As of May 31, 2014, CarMax operated 135 used car superstores across 67 markets. The company intends to open 13 used car superstores in fiscal 2015 and 10-15 superstores in each of the next two fiscal years.

Further, CarMax consistently enhances shareholders' value through buybacks. Banking on its business fundamentals and ability to achieve growth objectives, the board of directors raised the company's share repurchase authorization by $1 billion in Mar 2014. During the first quarter of fiscal 2015, CarMax spent $174.1 million to buy back 3.8 million shares. As of May 31, 2014, the company had an authorization of $1.11 billion remaining under the program.

However, incentives on new cars have encouraged consumers to trade in their old cars for new, which has lowered used-car sales and increased the used-car inventory. This is compelling CarMax to slash vehicle prices in order to cut used-car inventory, thereby shrinking margins.

Moreover, CarMax is incurring high cash outflow from operating activities. In the first 3 months of fiscal 2015, CarMax had a cash outflow of $209.1 million from operations, compared with $77.6 million in the prior-year period.

Other Stocks to Consider

Investors interested in automobile stocks could also consider Tesla Motors, Inc. ( TSLA ), Fox Factory Holding Corp ( FOXF ) and Gentherm Incorporated ( THRM ). While Tesla sports a Zacks Rank #1 (Strong Buy), Fox Factory and Gentherm carry a Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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