Would You Buy A Used Car From This Company?

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

If there's anything I hate more than filling out paperwork, waiting for hours, and dealing with aggressive salespeople, it's buying a car, which manages to combine all three.

Would you like a test drive?

Several companies have been trying to win my kind of business: that of people who hate the nonsense that traditionally goes with buying a car--especially that feeling that you've been taken for a ride. Chief among these are Carmax (NYSE: KMX) and AutoNation (NYSE: AN). CarMax sells used vehicles with no-haggle pricing, and undoubtedly you've seen their commercials. The ads also promise that the cars are thoroughly vetted with detailed service and accident records.

Cars that don't meet their standards are sold by wholesale auction to licensed dealers. The 20 year old company operates 118 superstores in 58 markets and has sold over 4 million cars. CarMax trades at a 22.65 P/E with a 1.82 PEG.

AutoNation sells new and used cars, but doesn't have its own financing arm like CarMax, although third party financiers are all too happy to help. Auto Nation calls itself America's Largest Automotive Retailer. It operates more like a traditional dealership with auto service, parts, and maintenance. It also offers cash cow extended service warranties, as does CarMax.

AutoNation also offers CarFax reports and certified pre-ownership papers, and a low price upfront policy. The company has 210 domestic and import franchises in the US and offers an online shopping option (so does CarMax).

AutoNation is down only 10% from its all time high of $48.45 in October. From its founding in 1999 it only took 12 years to sell 8 million vehicles. In terms of corporate transparency, Auto Nation was the first auto dealer to report monthly sales starting in 2010. It sold 21,168 new cars in February.

One of the biggest shareholders in AutoNation is Eddie Lampert and his ESL Partners, which took a 24% stake in the company in 2001, and which holds 32,367,876 shares respectively. AutoNation is trading at a 17.51 P/E.

I'll even throw in a case of detergent!

Then there's Costco Wholesale Corporation (NASDAQ: COST), the same place where you can buy everything from fine art and wine to cases of detergent.  Now you can also buy cars! If you know anything about Costco, you know that they are extremely discriminating about whatever they associate with their name.

The process is almost as simple as these other retailers once you have your annual membership card. You go online, research what you want on the Costco site (pre-owned or new), locate a dealer who has it, and the Costco approved dealer will contact you. Then you just check out the car and write your check.

Why would someone prefer to do it this way? The pre-negotiated Costco price can sometimes be below that of the Kelly Blue Book, and manufacturer's rebates and incentives are valid with the program. Actual online responses from people who used the program, whether as a jumping off point of negotiating with the Costco price at a different dealer or whether they just went with Costco, are somewhat mixed. The ones who really love it are those whose wives hate the haggling.

Let's check these numbers with my manager!!

Buying a car is more traumatic than it need to be, and these companies are trying to make it less stressful. It's certainly worked for investors, and analysts like at least one of the two car auto retailers as alternatives to the traditional hard sell. Six analysts rate CarMax a strong buy, five a buy, and three a hold, but their five year EPS growth rate predictions are the lowest of these three at 12.00%. AutoNation analysts are less sanguine with 10 holds, 2 underperforms, one buy, and one strong buy. Still, they expect 18.63% EPS growth for AutoNation over five years.

Costco just reported Q2 results for FY13 on March 12, so the numbers are straight off the lot. EPS was $1.24, up 38% from last year, and total locations worldwide came to 622. The all-important renewal of memberships number stayed high: just under 90% for the US and Canada and over 85% for the rest of world, despite last year's fee increases.

All the good news from Costco leaves it trading at a 25.22 P/E with a 1.10% yield and very close to its 52 week high of $105.97. With a PEG of 1.72 Costco is really a little hard to buy here. Let me write down the figure I'm willing to pay, at least knock it down 10% lower. Then you'd be in my neighborhood, especially considering the 13.20% five year EPS growth rate.

Let's seal the deal!

Both Costco and CarMax are trading close to 52 week highs. Despite analyst enthusiasm for CarMax, it seems overvalued here. Costco is a great retailer and the numbers were very good, but it too is marked up. The best overall value here is Auto Nation, with its PEG of .82 and highest predicted growth rate, as well as being off from its 52 week high. That said, if the Street saw fit to put Costco on sale I'd be mighty tempted to make a deal.

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COST Total Return Price data by YCharts


AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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