What Investors Should Know About CarMax Inc

Markets Motley Fool

In this segment from the Motley Fool Money show, Ron Gross and Jason Moser dig into upbeat first quarter results from CarMax (NYSE: KMX) to explain the many factors driving performance for a company in this industry.

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A full transcript follows the video.

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This video was recorded on June 23, 2017.

Ron Gross: CarMax reported better-than-expected first-quarter earnings. Pretty impressive results, really, across the board. Anything stand out to you in particular?

Jason Moser: Yeah, I think this is an interesting business, just because it has so many different forces that play out on how the business is going to perform. It's general economic outlook, the number of used cars that these guys may have access to, unemployment, all sorts of things, interest rates. So CarMax has been kind of a lumpy business here over the recent couple of years, and they have seen at least a shortage in inventory of older used cars based on weaknesses from the overall industry about eight years ago. Now, they're starting to see that roll off. And I think management is at least optimistic about these coming quarters. They feel like they're going to have more inventory to offer consumers, more choices.

If you think about it from the perspective of, if they don't have a healthy inventory of good used cars to choose from, when you couple that with all these automakers now offering all these great incentives for customers to go buy new cars, then it makes it far more difficult for CarMax. But they have built a really tremendous network out here across the country, making the used car shopping experience far easier than it was, perhaps, when folks like you and I were growing up, I didn't mean to date ourselves at all, but it is the fact. So I think they continue to do very well with that. Management, I think, has done a very good job at buying back shares. The share count is down about 17.5% since 2013, in the face of some lumpy performance, and I think it's also worth noting that the guys that we love down in Richmond at Markel, this is a big holding in their portfolio, as well. So all in all, I think this is a business still with a lot of tailwinds at its back, and I think we'll see the stock perform well here over the coming years.

Gross: You talk about lumpy performance. I saw some headlines that talked about how people were spending their tax refunds, and that's perhaps why the quarter looked so good. Is this a sustainable kind of business going forward? Or is it going to be that lumpy kind of business?

Moser: Well, there's no question you're going to see that sort of lumpy performance from fourth quarter into first quarter every year because of the tax refunds. Again, I think it goes back to the health of the economy, the health of the consumer. And I think right now, we're starting to see those trends all improving, which certainly bodes well for CarMax.

Jason Moser owns shares of Markel. Ron Gross owns shares of Markel. The Motley Fool owns shares of and recommends CarMax and Markel. The Motley Fool has a disclosure policy.