CarMax Inc. (NYSE: KMX) is getting squeezed by its own rising cost of borrowing money to finance consumer vehicle purchases, weakening consumer demand spreading across the board, declining customer traffic into sales locations, lower gross profit margins per vehicle, and rapidly accelerating declines in the resale prices of trucks, SUVs and other gas hogs already parked on its lots. All these factors mean that CarMax 1Q FY2009 EPS dropped to $0.13, down 55% from 1Q FY2008.
Don't look for improvement in any external factors in the near future. Nevertheless, CarMax senior management has decided to continue with its aggressive expansion program in order to gain market share across the country. Thus far, CarMax has opened six new used car superstores in 2008 with plans to open eight more. The company is also testing a program to centralize its appraisal and car buying programs into five car-buying centers spread throughout the country. CarMax hopes to obtain more of its used vehicles for resale directly from consumers rather than wholesale auto auctions. The profit margin is higher for CarMax on vehicles obtained directly from consumers.
CEO Tom Folliard has suspended guidance for the rest of FY2009 given so many broad-based economic uncertainties, including continued uncertainty in the subprime lending sector. CarMax's income from financing declined $27 million to $9.8 million in 1Q FY2009. The company is facing higher funding costs and higher loss assumptions. Presently the stock is trading right around $16, but will face an uphill battle just to stay in that price range.
MOST NOTEWORTHY: American International Group, Energy East and BG Group Plc were today's noteworthy upgrades:
Citigroup upgraded shares of American International Group (NYSE:AIG) to Buy from Hold on valuation as they see limited downside at current levels. They believe the stock is "poised for over 35% upside in the next twelve months" and raised their target price to $42 from $41.
Jefferies raised Energy East (NYSE:EAS) to Hold from Underperform to reflect the growing pressure from politicians to influence the final NYPSC order in the merger approval proceeding. The firm raised their target price to $25.50 from $16.50.
Bernstein upgraded shares of BG Group (NASDAQ:BRGYY) to Outperform from Market Perform as they believe the company should benefit from the tightness in the global liquefied natural gas market.
OTHER UPGRADES:
Total SA (NYSE:TOT) was upgraded to Buy from Neutral at Goldman and added to the Conviction Buy List.
Wachovia lifted CarMax (NYSE:KMX) to Market Perform from Underperform.
Pike Electric (NYSE:PEC) was raised to Outperform from Market Perform at Friedman Billings.
The tightening of access to credit and higher costs associated with financing hit used car seller CarMax Inc. (NYSE: KMX) right in the wallet. The company suffered a huge 48% drop in 4th quarter (4Q) net earnings, the vast majority of which stemmed from growing losses and increasing credit expenses in its auto finance unit. Thus unit posted a $1 million loss in 4Q2008, as compared to a $31.7 million profit in 4Q 2007. CarMax CEO Tom Folliard states the company is willing to tolerate such a loss in order to maintain in-house financing capabilities as a way to help boost sales and grow market share. But for how long? Fiscal Year (FY) 2008 earnings declined 8% as a result of the 4Q plunge.
CarMax is doing a whole lot of things right. 4Q sales increased 9% to just over $2 billion and FY 2008 sales increased 10% to $8.2 billion for used cars, to help counter a 20% decline in new car sales. Comparable store sales increased 3% and market share grew a bit. But in order to hit these numbers, CarMax dropped its gross profit per unit by $120. Average profit per unit sales was just over $2500.
"You can't sell what you can't finance" remains as true in the used car market as in real estate. Despite increasing costs for credit and financing, CarMax plans to continue its expansion plans, opening 14 used car superstores in 2009. Revenue is projected to grow in the 7-14% range based on modest growth in sales per unit volume. FY 2009 EPS is forecast at $0.78-$0.84. Used car retailers will remain in a much stronger financial position than new car retailers, at least for the foreseeable future.
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.
The nation's largest used-car retailer, CarMax, Inc. (NYSE: KMX) got hit with a huge increase in cost of funds this past quarter. The company's auto financing arm recorded a 49% decline in income for the quarter. Per unit gross profit margins declined by $146 per unit and are expected to continue to decline for the next quarter at least. This decline is typical for the model-year changeover period. On the up side, total used units sold increased by 9% and total sales revenue increased 7% to $1.89 billion. These increases, however, did not result in any increase in net earnings. On the contrary, net earnings for the quarter declined 34% to just under $30 million. Investors reacted predictably on the news, pushing the stock down 7% to close around the $20 mark.
CarMax continues to expand its market base, opening 5 new locations in the third quarter (3Q) alone. The company wants to expand its store base by 15-20% annually. This will be difficult with flat comparable store used unit sales and a 30% decline in new vehicle sales. CEO Tom Folliard issued revised guidance for FY 2008. Management now forecasts 2% sales growth and EPS in the $0.87-$0.93 range, down $0.05 per share from the previous forecast.
"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 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
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.
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.
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