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CarMax Remains Neutral

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On Jun 7, we maintained our Neutral recommendation on CarMax Inc. (KMX - Free Report) based on its aggressive store expansion strategy and focus on the used-vehicle market that can offset the impact of lower margins from used vehicle sales owing to the aggressive incentives offered by manufacturers and dealers.

Why the Reiteration?

On Apr 10, CarMax posted a profit of $107.2 million or 46 cents per share in the fourth quarter of fiscal 2013 ended Feb 28, 2013, slivering past the Zacks Consensus Estimate by a penny. Profits increased 12.8% from $95.0 million or 12.2% from 41 cents per share in the prior-year quarter.

After the earnings announcement, shares of CarMax reached a new 52-week high of $48.86 on May 16. Net sales and operating revenues in the quarter rose 14% to $2.83 billion, topping the Zacks Consensus Estimate of $2.70 billion.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for fiscal 2014 increased 0.5% to $2.07 per share. The Zacks Consensus Estimate for fiscal 2015 went up 0.9% to $2.29 per share. Currently, CarMax retains a Zacks Rank #3 (Hold).

CarMax focuses more on the used-car market, which helps to outperform its peers. It is one of the strongest operators with leading liquidity and profitability ratios among other automotive retail companies including Penske Automotive Group Inc. (PAG - Free Report) and AutoNation Inc. (AN - Free Report) .

CarMax undertook aggressive store expansion policy based on improving sales environment in the U.S. In fiscal 2013, the company opened 10 stores, bringing its used car superstore count to 118 as of Feb 28, 2013. The company also plans to open 10 to 15 more superstores in each of the following two fiscal years.

However, we are concerned about the sluggish sales environment for new vehicles, particularly for the domestic cars. The margins on used vehicle sales were adversely affected by incentives and attractive pricing offered by the manufacturers and dealers for the new cars. In addition, the used-car market in the U.S. is highly fragmented and competitive.

Other Stocks to Look For

O'Reilly Automotive Inc. (ORLY - Free Report) is performing well in the industry where CarMax operates. Currently, shares of O'Reilly retain a Zacks Rank #2 (Buy).

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