This Stock Shows Steady Returns

Anupriya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

CarMax (NYSE: KMX) the largest used car dealership chain announced its phenomenal third quarter ended results with soaring revenue. This was the second straight quarter of growth in revenue for the company and thus share prices reached a record high bringing good news for investors this Christmas. With reduced purchasing power and an economic slowdown in full swing, sale of used cars have an upper hand over brand new vehicles indicating a positive scenario for CarMax.

 A Look at the Figures

CarMax reported a whopping 13.9% growth in earnings per share surpassing all the analysts estimates. The total gross profit on used vehicles grew by 15% largely due to higher unit sales and increased customer confidence. Sales surged up by 12% as well. The wholesale business, though much smaller than the retail, also jumped up by 9.6%. Revenue from extended service plans (SVP) reported a 20% increase while revenue from the service department was also up by 7%. CarMax auto finance (CAF), the company’s lending unit, grew by almost 16% mainly due to improved management of receivables.

Competition Around

CarMax faces stiff competition from its peers in the market and outperforming its rivals is the main challenge ahead in front of CarMax.  AutoNation (NYSE: AN), an arch rival, reported a 20% rise in new car sale this November. AutoNation also sealed the deal to acquire Audi, Porsche and three Volkswagen stores from Boardwalk Auto group and Spring Chrysler Jeep Dodge Ram dealership from Alfred Flores and Bruce Glascock. These deals will increase revenues by almost $575 million.

Penske Automotive Group (NYSE: PAG) another automobile retailer, operates about 341 franchises with more than 40 brands and 30 repair centers. Revenue for the third quarter showed a rise of 17% while retail sales increased by 23%. Penske’s acquisition of two dealerships, namely Jon Lancaster Toyota Scion and Lexus in Madison, Wisconsin is also expected to generate about $130 million annually posing a threat to CarMax in the long run.

The Silver Lining

The customers have shown a positive response towards the lucrative offers made by CarMax and thus sales have been on a high. New store performance in Iowa, Colorado and Los Angeles has been overwhelming.  New store openings are on the cards which will further consolidate the company’s dominance in the market.

Final Take

CarMax pioneered the sale of used cars way back in 1993 and has never looked back ever since. It has been a consistent performer with stable return on equity and accelerating growth. With improved customer sentiments, favorable offers from third party finance providers, strategic expansion plans and optimum inventory management CarMax has a long way to go. I would thus recommend a buy for this stock.

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