Is This Car Dealer Offering a Good Deal?

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

It seems to be a party time for the American auto industry. Many people who couldn’t afford to buy a car immediately after the severe 2008 recession are finally replacing their cars with new cars. And buyers who couldn’t finance a new car are fulfilling their requirements with less expensive used models.

As a result of this, sales of both new and used cars have increased remarkably over the past few months. Almost all of the companies across the industry topped expectations in the present quarter. One such company is the used car-dealership chain CarMax  (NYSE: KMX). It reported first-quarter earnings beating Street estimates.

Quick look at the quarter

CarMax, which runs more than 120 stores in 61 markets mainly selling used cars and trucks, reported a 23.1% surge in its fiscal 2014 first-quarter earnings. Earnings rose to $146.7 million, or $0.64 per share, from $120.7 million, or $0.52 per share a year ago. Its revenue rose 19.3% to $3.3 billion.

What went right?

The rising numbers were backed by the higher sales of used cars. CarMax reported that 81.6% of its sales this quarter were in used cars, where used-vehicle sales increased 23.4% to $2.7 billion in the quarter over the same period last year. The higher used-car revenue was driven by both higher unit sales, which increased 22.1% to 137,154 vehicles, and higher average selling prices, which increased 1.3% to $19,540. Sales at stores open at least one year rose 17%, which is a remarkable achievement as performance was flat last year.

Apart from the current used car sales boom in the auto industry, a better consumer-credit environment also helped CarMax reach those rising numbers. About 9% of its customers received financing offer from one of its lenders. Income from CarMax's auto-financing arm rose nearly 16% to $87 million in the quarter.

As I have mentioned before, it’s not just CarMax that has performed such brilliantly in the current quarter. Many companies across the industry have performed equally as well over the past few months.

Penske Automotive Group (NYSE: PAG), an international automotive retailer, reported the highest income and earnings per share in company history in its last quarter. The company’s total retail unit sales increased 9.9% to 85,821. Performance was driven by an increase of nearly 10% in new-unit retail sales and more than a 10.2% rise in used-unit retail sales. Its total revenue increased 7.7% to $3.4 billion.

The company also has plans to increase its geographical presence in the market. Penske has recently entered North Ireland and Italian markets. Penske's international expansion can help the company to drive some outstanding results in the coming quarters. Even analysts expect this company to grow at an annual rate of 17% to 18% over the next five years. 

Also, America's largest automotive retailer, AutoNation (NYSE: AN), is performing brilliantly these days. In its last quarterly earnings report, the company reported a 12% increase in its revenue . It is very obvious that AutoNation will continue beating estimates in the next quarter as well as the company has already reported 10% and 11% rise in its total retail new-vehicle unit sales in April and May respectively, which surely assures its promising future.

What’s next?

For any company, increasing its market presence in the industry assures greater return on its investment. CarMax is supposedly on the right track again. The company has opened three stores in the first quarter of fiscal 2014 and has plans to open 10-to-15 superstores in each of the next two fiscal years. By increasing its market presence, the company is expected to add to its top and bottom lines in the next few years.

Foolish takeaway

At present, the entire US auto industry is going through a good phase and CarMax, being a part of it, no doubt has a bright future. The company is constantly focusing on expansion and increasing market presence and with such strong quarterly results this stock is worth keeping an eye on.

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Satarupa Bose has no position in any stocks mentioned. The Motley Fool recommends CarMax. 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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