RBC Capital Markets believes CarMax Inc. (NYSE: KMX) has significant long-term growth potential, while the company's shares are admittedly not cheap. The brokerage reiterated its "outperform, above average risk" rating on shares of CarMax with a price target of $37.
"We believe the company has essentially developed a 'better mouse trap' to sell used cars and we think that unit economics are fairly sustainable at current levels given current used vehicle prices, reduced reconditioning costs, and the growing utilization of the company’s massive information flow," said Scot Ciccarelli, an analyst at RBC Capital.
Further, while Ciccarelli believes that CarMax Auto Finance (CAF) is "over-earning" in the current environment and that spreads will start to contract (spreads started to come down a bit in their latest securitization) over time, he believes that CAF will continue to over-earn for the foreseeable future given the current interest rate environment.
Ciccarelli views shares of CarMax as a compelling long-term holding, but he is also wary that a sharp spike in gas prices can disrupt the business.
CarMax is set to report its fourth quarter earnings on March 31. Ciccarelli is looking for fourth quarter earnings of $0.36 per share versus $0.33 per shaer last year, just below consensus of $0.38 per share, based on a 12 percent increase in used vehicle unit comps, a 2 percent improvement in used vehicle average selling prices, and a 1 percent increase in GP$/used vehicle to $2,088.
Ciccarelli said most data points indicate that used vehicle sales trends remain strong across the industry despite accelerating new car sales. Shorter-term, recent supply disruptions in Japan could continue to bode well for used car sales.
Finally, Ciccarelli believes that unit economics will remain solid, since used vehicle prices remain near record highs, reconditioning costs have dropped, and the company is increasingly utilizing its industry-leading “information flow” to better maximize profits.
"In addition to gaining market share, we continue to believe CarMax has significant store growth potential in front of it. We are forecasting about 5 percent store growth in 2011/fiscal 2012 but believe that it could accelerate to about 10 percent annually in 2012/fiscal 2013 and beyond. Given the maturation process of CarMax stores, new store maturity should become an embedded comp driver for the company," said Ciccarelli.
The brokerage maintained its 2011 EPS estimate for CarMax of $1.65 on revenue of $8.83 billion, its 2012 estimate of $1.80 on revenue of $9.56 billion, and its 2013 estimate of $2.00 on revenue of $10.45 billion.
CarMax stock is trading up 0.91 percent at $33.30 on the NYSE at 10:34 am EDT.
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