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On May 9, 2014, we issued an updated research report on CarMax Inc. (KMX - Analyst Report). CarMax posted adjusted earnings per share of 52 cents in the fourth quarter of fiscal 2014 (ended Feb 28, 2014), increasing 13% from 46 cents a year ago. Earnings lagged the Zacks Consensus Estimate of 53 cents.

Net sales and operating revenues in the quarter rose 8.8% to $3.08 billion, lagging the Zacks Consensus Estimate of $3.19 billion. The year-over-year improvement in revenues was mainly due to increases in used vehicle sales, new vehicle sales and higher revenues from service department sales.

In the long run, CarMax’s focus on the used-vehicle market and its aggressive store expansion strategy should help it outperform peers. The company also follows a strong capital deployment strategy via share buybacks.  

However, we are concerned about the pressure on used-vehicle margins, high competition in the used-car market and high cash outflow of the company. In fiscal 2014, CarMax had a cash outflow of $613.2 million from operations. Capital expenditures increased to $310.3 million from $235.7 million in fiscal 2013.

CarMax reported positive earnings surprises in 2 of the trailing 4 quarters with an average beat of 4.27%. The Zacks Consensus Estimate for the company’s fiscal 2015 (ended Feb 28, 2015) earnings is $2.43 per share, up 8.43% over fiscal 2014.

CarMax currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked automobile stocks worth considering are U.S. Auto Parts Network, Inc. (PRTS - Snapshot Report), Volkswagen AG (VLKAY) and Fuji Heavy Industries Ltd. (FUJHY). Currently, Volkswagen carries a Zacks Rank #1 (Strong Buy), while U.S. Auto Parts and Fuji Heavy Industries are Zacks Rank #2 (Buy) stocks.

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