CarMax Earnings Preview

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

Coming up on December 20 are third-quarter results from CarMax (NYSE: KMX). Wall Street is expecting earnings of $0.38 per share – an unchanged EPS during the same period the previous year. The last time CarMax reported quarterly earnings, investors were disappointed by a negative earnings surprise of over 7%; analysts were expecting $0.52 and the company delivered $0.48. Shares of CarMax dropped in the following few days, but have since recovered quite nicely; since the last earnings report three months ago, CarMax shares have risen more than 17%.

Earnings and Revenue

CarMax hasn’t been dependably meeting analysts’ expectations as of late. The company reported lower-than-expected earnings in four of the past five quarters. Of the past five quarters, the only instance of a positive earnings surprise happened in Q4 of fiscal 2012, when actual earnings-per-share came in 3.14% above estimates.

<img src="/media/images/user_13431/carmax-eps-chart_large.png" />

Are these numbers making you suspicious of CarMax’s ability to generate income for its shareholders? Don’t be turned off too quickly. Annual earnings-per-share for fiscal years 2011 and 2012 met expectations of $1.66 and $1.79, respectively. Looking at revenues, CarMax saw revenues rise in three straight quarters from Q3 of FY 2012 to Q1 of FY 2013, and the leveling-off of revenue in Q2 of FY 2013 was better-than-expected. Annual revenues for 2011 and 2012 came in 1% higher than analysts had estimated.
<img src="/media/images/user_13431/carmax-revenue-chart_large.png" />


CarMax is in the business of selling used vehicles, and the company is the largest in its industry. The marketplace for used cars in the U.S. is highly competitive, with companies like AutoNation (NYSE: AN) and Penske Auto Group (NYSE: PAG) biting at the heels of CarMax. AutoNation’s earnings have been steadily growing and the company has consistently exceeded analysts’ expectations. Penske Auto Group has seen its net income shrink over the past five quarters, with earnings-per-share remaining stagnant throughout that time. Despite this, of the three companies mentioned, Penske has seen its stock rise the most year-to-date; Penske experienced a 47% gain, CarMax gained 15%, and AutoNation gained 8%.

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PAG data by YCharts

Investor Sentiment

There currently seems to be a bullish attitude toward CarMax stock. At Motley Fool CAPS, 90% of members rate the stock outperform while 10% are bearish. The stock has a three out of five-star rating on, with 286 of the 299 highest-ranked CAPS members giving CarMax a thumbs-up. In late November, Goldman Sachs raised its rating on CarMax from Neutral to Buy, and other firms are similarly optimistic. In making its recommendation, Goldman Sachs said:

"We view KMX as one of the best ideas in our space for 2013, with idiosyncratic catalysts; we see an inflection point in earnings and financial returns. Drivers include used car supply, tackling key technology challenges (mobile); benefiting from re-accelerated growth; and, capital allocation (first buyback)," … "While the stock has acted well of late (+27% since September 28 vs. S&P -2%), EPS trends and share price performance have underperformed growth peers for the past two years, and we expect the stock to ride accelerating earnings trends and a nominal rerating of its multiple as well."

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