The Associated Press reports that Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) bought 14 million shares of Carmax Inc. (NYSE: KMX) this summer. If he bought the shares this summer, his lowest entry point would have been at $22.30 in mid-August, which means that with this morning's uptick -- Carmax traded up $2.17 to $23.64 in early trade -- he is now above water on his position.
Carmax operates 86 used car stores nationwide in 39 markets and is preparing to open a new store in Omaha next month about 12 miles west of Buffett's office. Carmax says it sold 337,021 used vehicles and 208,959 wholesale vehicles at auction last year. It is interesting that in September, according to Bloomberg News, Carmax cut its full year guidance 14% to between 92 cents and 98 cents a share from a forecast made in June.
Why would Buffett be interested in Carmax? Could be that he expects a recession which would lead more people to the used car lots rather than buying them new. Moreover, it could be that people will sell their cars to cover their living expenses as the price of gasoline surges upward. Or it could be that Carmax looked cheap to him -- it traded at a Price/Earnings to Growth (PEG) ratio of 1.1 in July -- at a P/E of 21.5 on earnings forecast to grow 19.4% to $1.13 in the fiscal year ending February 2009. It would not surprise me if Buffett expects even faster growth.
It might be worth following Buffett into Carmax -- particularly if you think a recession is in the cards.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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