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On Mar 3, 2014, we issued an updated research report on CarMax Inc. (KMX - Analyst Report). The company reported positive earnings surprises in two of the trailing four quarters, with an average beat of 6.32%.

CarMax posted earnings per share of 47 cents in the third quarter of fiscal 2014 (ended Nov 30, 2013), increasing 14.6% from 41 cents a year ago. Reported earnings missed the Zacks Consensus Estimate by 1 cent. Net earnings increased 12.4% to $106.5 million from $94.7 million a year ago.

Together, net sales and operating revenues in the quarter rose 13% to $2.9 billion, missing the Zacks Consensus Estimate of $3.1 billion. The year-over-year improvement in revenues was mainly due to increases in used vehicle sales and new vehicle sales.

Unlike its peers, CarMax focuses more on the used-car market, which helps it to outperform the industry. The company follows a strong capital deployment strategy via share buyback to boost shareholder value. Moreover, the aggressive store expansion strategy is raising revenues.

However, CarMax is incurring high cash outflow from operating activities. Moreover, incentives on new cars have encouraged consumers to trade in their old cars for new, which has lowered used-car sales and increased the used-car inventory. This is forcing CarMax to lower the prices of vehicles in order to reduce high used-car inventory, thereby shrinking margins.

CarMax currently carries a Zacks Ranks #2 (Buy).

Stocks That Warrant a Look

Other stocks worth considering in the auto industry include Advance Auto Parts Inc. (AAP - Analyst Report), AutoZone, Inc. (AZO - Analyst Report) and O’Reilly Automotive Inc. (ORLY - Analyst Report). While Advance Auto Parts currently carries a Zacks Rank #1 (Strong Buy), AutoZone and O’Reilly hold a Zacks Rank #2.

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