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.

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.

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