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Can CarMax's (KMX) Impressive Momentum Continue in 2020?

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CarMax, Inc. (KMX - Free Report) looks well poised to sustain previous year’s momentum in 2020, backed by store-expansion efforts and focus on used-car market. Moreover, the company is committed toward enhancing its shareholder value.

These factors have enabled CarMax to deliver a strong earnings trend and boost investors’ optimism despite higher SG&A expenses and industry headwinds. This Zacks Rank #3 (Hold) stock has surged 40.7% in the past year compared with the industry’s rise of 28.5%.

Strategies to Drive Growth

The company follows an aggressive store-expansion initiative in the existing as well as new television markets. As of Feb 28, 2019, the company operated in 100 U.S. television markets, which covered approximately 76% of the U.S. population. Further, it plans to open 13 stores in fiscal 2020 and a similar number of stores in fiscal 2021. Additionally, the company is making improvements to its digital platform in a bid to drive website traffic.

Unlike its peers, CarMax focuses more on the used-car market. Expensive new vehicles significantly spurred demand for cheaply-available used vehicles. Further, the company’s customer-friendly sales process positions CarMax well.

CarMax’s increasing cash flow and strengthening balance sheet enable it to consistently enhance shareholder value through buybacks. In fiscal 2019, the company spent $902.9 million to repurchase 13.6 million shares under the existing share-buyback program. As of Aug 31, 2019, it had $1.78 billion of authorization remaining under its share-repurchase program.

Will CarMax Overcome Hurdles?

Abundant supply of off-lease used vehicles, which cannot be absorbed by the market adequately, will likely result in higher depreciation rates and lower prices. Selling vehicles at lower prices might drag down the company’s margin.

In fiscal 2019, CarMax’s SG&A expenditure flared up roughly 7%, year on year, to $1.73 billion. This upswing primarily stemmed from expenses related to store openings. Increased investments to develop technology platforms and digital initiatives, along with share-based compensation expenses, are also escalating the company’s expenses. The company has been affected by lower selling prices, along with rising expenses, for the past few quarters.

While operational inefficiency has been affecting the firm, impressive results from the used- vehicle segment is likely to help maintain the company’s bull run in 2020 as well. Moreover, the Zacks Consensus Estimate for fiscal 2020 and 2021 indicates year-over-year improvement of 9.2% and 8.5%, respectively.

Stocks to Consider

Some better-ranked stocks in the Auto-Tires-Trucks sector include Douglas Dynamics, Inc. (PLOW - Free Report) , Tesla, Inc. (TSLA - Free Report) and SPX Corporation (SPXC - Free Report) . While Douglas Dynamics flaunts a Zacks Rank #1 (Strong Buy), Tesla and SPX carry a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Douglas Dynamics has an estimated earnings growth rate of 10.42% for 2020. The company’s shares have surged 61.1% in a year’s time.

Tesla has a projected earnings growth rate of 1,246% for the current year. Its shares have gained 35.4% over the past year.

SPX has an expected earnings growth rate of 8.09% for the ongoing year.The stock has appreciated 89% in the past year.

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