CarMax After Earnings: Buy, Hold, or Sell?

Source: CarMax.

fell by more than 4.2% on Friday after reporting lower-than-expected earnings for the quarter ended on Feb. 28. But the company is still performing soundly, and CarMax is a differentiated player in the car dealership business with the competitive strength to continue outgrowing competitors such as AutoNation and Copart in the years ahead. Is the recent dip in CarMax a buying opportunity or should investors stay away from the company?

Earnings came in below analysts' expectations, but one-time accounting changes had a big impact during the quarter. CarMax changed its accounting for cancelation reserves, which reduced earnings per share by $0.08 during the fourth quarter of 2014. Only $0.01 of that money was related to operations during the quarter, though; adjustments to earlier quarters in fiscal 2014 accounted for $0.02 in expenses, and $0.05 per share was related to fiscal 2013 and fiscal 2012.

Adjusting for this accounting charge, earnings per share would have increased by 13% versus the prior year on the back of a healthy increase of 9% in revenues to $3.08 billion. Total used unit sales increased by 12% during the quarter, and used unit sales in comparable stores grew by 7% versus the same quarter in the prior year.

CarMax is facing challenges as subprime lenders cut back their loan originations lately, but the company is building its own loan portfolio to gain autonomy and reduce its dependency on third-party originations. CarMax plans to originate approximately $70 million in loans during the initial test, of which $9.1 million was originated in the fourth quarter of fiscal 2014.

All in all, it was a solid quarter for CarMax, especially considering that the harsh winter and a challenging environment for consumers presented considerable headwinds during the period.

CarMax follows a differentiated strategy that makes the company a unique player among car dealerships. As opposed to the typical high-pressure sales tactics and often obscure sales terms used by most competitors, CarMax uses a no-haggle pricing policy, which makes the negotiation process much simpler and more comfortable for the consumer.

Sales team employees work on fixed commissions; this means they make the same commission regardless of which car the customer buys. This way, employees can focus their effort and attention on finding the best car according to customer's needs instead of trying to push the vehicles that generate higher commissions.

Judging by response to customer satisfaction surveys, clients seem to really appreciate CarMax's customer-friendly philosophy.

Source: CarMax.

This innovative approach has been quite successful for CarMax, and it has allowed the company to build additional sources of competitive strength as it gains market share versus the competition. Brand recognition, inventory variety, economies of scale, and geographical reach are other important factors differentiating CarMax from other car dealerships and positioning the company for sustained performance in the future.

According to management, CarMax increased its share of the used-car market by 17% during fiscal 2014. CarMax has consistently outgrown competitors such as AutoNation and Copart over the years, and the company continues to outperform based on recent financial reports.

AutoNation announced an increase of 8% in sales during the fourth quarter of 2013 to $4.5 billion. New-vehicle sales increased by 5% on the back of a 1% increase in same-store sales, while used-vehicle sales grew 15% overall and 10% on a same-store sales basis. As for March, AutoNation reported a 6% increase in total new vehicle unit sales and a 4% growth rate in new vehicle unit sales on a same-store basis. 

Copart announced an increase of 7.6% in revenues during the quarter ended on Jan. 31 to 286.4 million during the period. Services sales grew 8.7% to $235.7 million, while vehicle sales grew by a much lower 2.9% to $50.7 million during the period.

In the mature and competitive industry of car dealerships, gaining market share versus competitors is a crucial growth driver for CarMax, and also a strong reflection of the company's unique business model and differentiated strategy.

CarMax's recent decline looks like no reason to worry. One-time accounting adjustments masked what would otherwise be healthy results from the company, and CarMax continues to demonstrate that its differentiated customer-friendly approach to the business generates superior performance and market share gains in an intensely competitive industry such as car dealerships. The lower the price goes, the better the opportunity.

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The article CarMax After Earnings: Buy, Hold, or Sell? originally appeared on

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends and owns shares of CarMax. It also recommends Copart. 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.

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