Earnings reports continue to dribble in as the quarter winds down. Much of the attention this week will be on homebuilders KB Home (NYSE: KBH) and Lennar Corp. (NYSE: LEN) as investors look for any sign that the housing sector has bottomed (home sales numbers are also due out this week; see below). Analysts surveyed by Thomson Financial anticipate that both companies will report that they narrowed their losses in the most recent quarter.
KB Home's expected $1.25 per share loss, on revenue of $725.5 million, compares to the previous quarter loss of $3.30 and to a year-ago loss of $6.19. However, KB Home's losses in the past few quarters have been deeper than expected. The Los Angeles-based homebuilder's long-range earnings growth forecast is 10.5%, less than the S&P 500. Analysts continue to recommend holding KB Home, and have for at least 120 days. Shares, however, reached a new 52-week high of $31.69 on Friday, and they are up 10.5% year to date.
Lennar is expected to post a loss of 52 cents per share, on revenue of $1.1 billion. That compares to the previous quarter's per-share loss of 76 cents and to a year-ago loss of $3.25. While Lennar also has tended in the past few quarters to miss expectations, the Miami-based company managed a positive surprise in the first quarter of 2008. Lennar's long-range earnings growth forecast is 10.3%, about the same as KB Home's. Analysts also recommend holding Lennar. Friday, shares of Lennar also reached a 52-week high, $27.75, but they are down 6.4% year to date.
CarMax Inc. (NYSE: KMX) shares are trading higher this morning after the company reported a fourth-quarter profit of $21.8 million, or 10 cents per share. Excluding one-time charges, KMX earned 20 cents per share, beating analysts' predictions of 16 cents per share. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on KMX.
After hitting a one-year high of $27.42 in July, the stock hit a one-year low of $15.81 in January. KMX opened this morning at $19.09. So far today the stock has hit a low of $19.05 and a high of $20.70. As of 10:30, KMX is trading at $20.22, up $0.63 (3.2%). The chart for KMX looks bullish and steady.
For a bullish hedged play on this stock, I would consider a May bull-put credit spread below the $15 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just 7 weeks as long as KMX is above $15 at May expiration. KMX would have to fall by more than 28% before we would start to lose money. Learn more about this type of trade here.
The Wall Street Journalheadline says it all: "Lax Lending Standards Could End Up Fueling Sudden Acceleration in Auto-Loan Delinquencies".
It makes perfect sense and could even be worse than the subprime home lending crisis in terms of its impact on the industry. Because taking out a car loan is pretty rarely a savvy financial move -- and people tend to use them to buy cars they really can't afford -- the industry may be especially vulnerable to an economic slowdown. Irresponsible borrowers are more likely to take out car loans than home loans, and also more likely to walk away from them. And there isn't going to be any federal bailout to help fast food workers keep their Escalades.
Analysts report that delinquencies in car loans rose sharply in late 2007. Consequently, it's important to look at the possible exposure any automotive-related company you invest in has to credit problems. Some companies do their own financing, others don't. A quick look at the risk factors disclosed in the 10-Ks filed with the SEC may provide some clues.
For 25 years, Steven Halpern, editor of TheStockAdvisors.com, has surveyed the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is one of 100+ ideas in the Best Stocks for 2008 report.
Warren Buffett's Berkshire Hathaway has recently disclosed that is has taken a 6.4% stake in the used-car retailer. It's impossible to know for sure if Berkshire's stake is the result of Buffett's own buying or that of one of Berkshire's subsidiary companies, but either way it's a vote of confidence for CarMax.
"KMX has been sliding in recent months due to fears that a consumer slump would impact sales of used cars. But we continue to believe those concerns are overblown.
"The company offers a unique shopping experience that is unrivaled by traditional used-car dealerships -- the firm's superstores are well-stocked, offer haggle-free pricing, and provide painless trade-ins and vehicle financing.
"Warren Buffett's Berkshire Hathaway has disclosed that is has taken a 6.4% stake in CarMax (NYSE: KMX)," says value investor Nathan Slaughter.
CarMax, the used-car retailer, is a holding in Half-Priced Stocks, and the advisor sees Buffett's interest as an additional reason to stay bullish. Here is his review.
"Berkshire Hathaway is the insurance and investing conglomerate controlled by billionaire investor Warren Buffett, whose moves are widely followed by Wall Street.
"It's impossible to know for sure if Berkshire's stake is the result of Buffett's own buying or that of one of Berkshire's subsidiary companies, but either way it's a vote of confidence for CarMax. KMX has been sliding in recent months due to fears that a consumer slump would impact sales of used cars. But we continue to believe those concerns are overblown.
Shares in Carmax, Inc. (NYSE: KMX) soared nearly +16% in the past month, thanks in part to a regulatory filing disclosing the fact that Berkshire Hathaway has taken a 6.4% stake in the used-car retailer. The shares were purchased during the months of July, August and September. Although CarMax has since retreated from the highs as a result of the sell off, this presents a good buying opportunity.
Berkshire Hathaway is the insurance and investing conglomerate controlled by billionaire investor Warren Buffett. Buffett is perhaps the most respected investor in history; his moves are widely followed by Wall Street. It's impossible to know for sure if Berkshire's stake is the result of Buffett's own buying or that of one of Berkshire's subsidiary companies, but either way it's a vote of confidence for CarMax.
KMX has been sliding in recent months due to fears that a consumer slump would impact sales of used cars. But we continue to believe those concerns are overblown. The company offers a unique shopping experience that is unrivaled by traditional used-car dealerships -- the firm's superstores are well-stocked, offer haggle-free pricing, and provide painless trade-ins and vehicle financing.
The used car business is highly fragmented in the U.S., so CarMax has room to grow simply by taking market share from smaller operators that offer less attractive services. With this in mind, my staff and I believe KMX can remain resilient in the face of a consumer slowdown.
KMX trades at less than 20 times next year's earnings, and the company has a projected long-term growth rate of +18%. This represents outstanding value for a proven, fast-growing leader like CarMax, and we think this recent pullback presents an attractive buying opportunity.
If you are interested in more analysis from Paul Tracy, you can find it at StreetAuthority.com
Shares of CarMax (NYSE: KMX) soared 7.5% last week on rumors that Berkshire Hathaway's (NYSE: BRK.A) Warren Buffett was was buying.
But it wasn't so. In reality, Berkshire subsidiary Geico was buying the stock. While that company's stockpicker, Lou Simpson, has a strong reputation, it is not up to the level that his involvement sends stocks flying.
But let's think about the wisdom of stocks going up because Buffett is buying, and whether it fits into the efficient market hypothesis, the theory taught in finance classes across the country. The theory states that the market is a nearly perfect discounting mechanism, and that the current stock price reflects the present value of the company's future cash flows.
If that's true, why did CarMax go up 7.5% on rumors of Buffett's interest? That's a gain in value of more than $300 million and, this is important, Buffett is never an activist investor. He buys companies where he likes the management, and makes no effort to shake things up. So how could his buying possibly add $300 million to the present value of CarMax's future cash flows?
I'm generally a believer in at least the weak form of the efficient market hypothesis, but there are all kinds of little holes in the stronger form, and the phenomenon of copycat buying would appear to be one of them
MOST NOTEWORTHY: Athenahealth, Marvell Technology, Broadcom and Nvidia were today's noteworthy initiations:
Athenahealth (NASDAQ: ATHN) was initiated with a Neutral rating at Goldman Sachs. Jefferies started shares of the stock with a Buy rating and $46 target, as they believe their estimates could prove conservative given potential upside from new and existing physicians adopting athenaClinicals.
Kaufman Bros initiated Marvell Technology (NASDAQ: MRVL) with a Hold rating and $18 target, as they believe near-term growth prospects remain uncertain and recommends waiting for more favorable entry points.
The firm also initiated Broadcom Corporation (NASDAQ: BRCM) with a Hold rating and $35 target, and believes the company's growth prospects are priced into shares following the recent rally, and started shares of Nvidia Corporation (NASDAQ: NVDA) with a Buy rating and $42 target, as they believe the company's growth opportunity and competitive strength remain intact and would be buyers at current levels.
OTHER INITIATIONS:
Goldman started shares of Sara Lee (NYSE: SLE) with a Neutral rating and $16 target.
UBS initiated US BioEnergy (NASDAQ: USBE) with a Neutral rating.
Bear Stearns inititated CarMax (NYSE: KMX) with an Underperform rating.
MOST NOTEWORTHY: Penske Automotive, CarMax, Towerstream, Solera and Northstar were today's noteworthy initiations:
Kevin Dann initiated shares of Penske Automotive Group Inc (NYSE: PAG) with a Buy rating and $25 target. The firm believes shares deserve a higher multiple given the company's reduced exposure to slower growing domestic brands combined with the increased penetration o luxury as a percentage of industry sales.
CarMax Inc (NYSE: KMX) was also initiated at Kevin Dann with a Buy rating and $28 target, as they expect the multiple expansion to continue as confidence builds in the company's sales and expense strategy.
Think Equities started shares of Towerstream Corporation (NASDAQ: TWER) with a Buy rating and $5 target and said the company is rapidly growing given robust demand fro high bandwidth services, market expansion, sales force growth, and higher ARPU services.
Barrington believes Solera Holdings Inc (NYSE: SLH) is positioned to capture growth through technology adoption in claims processing by insurance companies, starting shares off with an Outperform rating and $27 target.
Jefferies resumed coverage of Northstar Neuroscience Inc (NASDAQ: NSTR) with a Buy rating and $21 target, as they expect the company's Phase III EVEREST trial to yield positive positives, setting the stage for an FDA approval by Q109.
OTHER INITIATIONS:
Friedman Billings started shares of IPG Photonics Corporation (NASDAQ: IPGP) with an Outperform rating and $28 target and added shares to its Top Picks List.
Nike (NYSE: NKE) option prices up into 9/20 EPS & Outlook. NKE will report EPS on 9/20. Thomson First Call estimates 1Q EPS of $0.87 cents. TWPT has a 12-month price target of $62.92 and say's "expect healthy growth in futures orders." NKE September 55 straddle is priced at $3.60. NKE October option implied volatility of 28 is above its 26-week average of 25 according to Track Data, suggesting larger price fluctuations.
CarMax (NYSE: KMX) option prices Elevated into 9/19 EPS & Guidance. KMX is expected to report 2Q EPS of $0.29 cents 9/19 according to Thomson First Call. Goldman Sachs say's "the stock still screens as inexpensive relative to historical levels, and we continue to believe lingering credit concerns may be overdone." KMX September 25 straddle is priced at $2.35. KMX October option implied volatility of 57 is above its 26-week average of 35 according to Track Data, suggesting larger risk.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
Getting the right used car can be an ordeal, but there is an outfit headquartered in Richmond, Virginia that has the right idea. It operates a Website that lets customers search its inventory nationwide for a particular model.
CarMax (NYSE: KMX) deals primarily in used cars and light trucks. The firm buys, reconditions and sells vehicles in 38 markets, mainly in the Southeast and Midwest. It also provides a range of related products and services, including vehicle financing, appraisal and repair. The firm operates eighty used car superstores and seven new car franchises. AutoNation (NYSE: AN) is a major competitor.
CarMax pleased investors last week, when it reported essentially in-line results for its fiscal first quarter and offered in-line guidance for FY08 EPS. Management also predicted a comparable store used car sales growth rate of three to nine percent. KMX shares popped on the news and have now begun to define a bullish "pennant" consolidation pattern. Prices frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.
Brokers recommend the shares with two "strong buys" and 10 "holds." Analysts see a 20% growth rate, through the next year. The stock's Price to Sales ratio (0.73), Price to Book ratio (4.23), Return on Assets (11.53%) and Return on Investment (15.26%) compare favorably with industry, sector and S&P 500 averages. About 93% of the outstanding shares are held by institutional investors. The issue is one of those used to calculate the S&P 400 MidCap Index. Over the past 52 weeks, it has traded between $16.51 and $29.45. A stop-loss of $22.50 looks good here.
Wall Street is enjoying a pretty good start to the day with all the major indexes trading up about 0.5%, but not all is well. Shares of used car retailer CarMax Inc (NYSE: KMX) have been hit hard by sellers this morning following the company's fourth quarter earnings release before the bell.
The bears came out in full force this morning and have pushed the stock down 4.5% to $25.84 down $1.23. This comes after the car dealer posted earnings of $0.19 per share this morning. Analysts had been expecting to see earnings come in at $0.21 per share.
All in all, CarMax put up some pretty nice improvements in their numbers, but they just weren't as impressive as Wall Street had been looking for. Revenues jumped a pretty impressive 16% to $1.88 billion but came in just a bit shy of the $1.9 billion traders were hoping to see.
Looking ahead to 2008, the company estimates that they are going to see revenue growth of between 14 and 20%. The expect to see earnings in 2008 come in somewhere between $1.03 and $1.14 per shares. Analysts are estimating actual earnings to come in pretty much in the middle of the company's range at $1.08.
Michael Fowlkes has worked as a stock trader for seven years and spent the last two years working as an analyst for the online investment advisory service Investor's Observer.
Earnings reports continue to dribble in as the quarter winds down. Much of the attention this week will be on homebuilders KB Home (NYSE: KBH) and Lennar Corp. (NYSE: LEN) as investors look for any sign that the housing sector has bottomed (home sales numbers are also due out this week; see below). Analysts surveyed by Thomson Financial anticipate that both companies will report that they narrowed their losses in the most recent quarter.
"My top conservative stock idea for 2008 is 
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guidance for FY08 EPS. Management also predicted a comparable store used car sales growth rate of three to nine percent. KMX shares popped on the news and have now begun to define a bullish "pennant" consolidation pattern. Prices frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.
Wall Street is enjoying a pretty good start to the day with all the major indexes trading up about 0.5%, but not all is well. Shares of used car retailer 
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