CarMax Revs Up Its Earnings Engines Going Into 2015

Source: CarMax.

The automobile business is one of the most sensitive industries to changing economic conditions, and investors have been waiting forcar-selling specialist CarMax to benefit from improving conditions in the U.S. economy. After some hiccups last quarter, though, CarMax shareholders weren't quite sure what to expect from the dealership chain's fiscal third-quarter results. Friday morning's announcement of CarMax's quarterly earnings put a stop to any nagging fears, with the company delivering record earnings per share and showing accelerating growth in many key areas. Let's look more closely at the results and what they suggest for the company's future in 2015 and beyond.

CarMax gives shareholders that new-car smellBy most accounts, CarMax had a blowout quarter. Net sales jumped almost 16% to land at $3.41 billion, well above the $3.26 billion that most investors had expected. Although the ongoing growth of CarMax's network was key in driving that spike, comparable-store used-unit sales also gained 7.4%, which was a vast improvement over last quarter's tepid 0.2% comps. CarMax collected earnings per share of $0.60, with net income climbing 22% and stock buybacks pushing EPS growth to an even greater 28%. The consensus estimate projectedCarMax would only earn $0.54 per share.

Looking at CarMax's various segments, used vehicle sales continued to drive the bulk of the company's overall revenue, gaining nearly 17% from last year's fiscal third quarter. CarMax's wholesale vehicle business also did reasonably well, posting a better than 10% gain in sales. Other divisions contribute little to CarMax's overall results, but curiously, the company grew its revenue from selling extended warranty plans to its customers by 26%.

Source: CarMax.

Of particular note was CarMax's auto finance segment, which recovered substantially from a disappointing performance last quarter. Income from the segment rose almost 7% to $89.7 million, with loan origination volume climbing and helping to boost receivables above the $8 billion mark. Despite a drop in interest margin, CarMax has considered expanding this part of its business to make it easier for customers to get financing for their vehicle purchases.

In addition, CarMax improved its internal business efficiency. Keeping a lid on growth of selling, general, and administrative expenses helped the auto dealer boost its profit margin by two-tenths of a percentage point; while that might not sound like much, going from 3.6% to 3.8% played a major role in sending the company's overall net income higher.

CarMax was pleased with the quarter, with CEO Tom Folliard celebrating its record results. "Continued strong performance in our used, wholesale, and CAF operations, along with the growth of our store base and our ongoing share repurchase program, contribute to our record third-quarter earnings per share," said Folliard.

Can CarMax keep accelerating?

Source: CarMax.

CarMax expects to continue expanding its dealership network, with plans for 11 new stores within the next 12 months. Four of those stores will open up brand new markets for CarMax: Cleveland, Minneapolis/St. Paul, and the Florida markets of Gainesville and Tallahassee. Looking further out, CarMax plans to open 10 to 15 stores each year in fiscal 2016 and 2017, helping to support its overall growth efforts.

The big question facing CarMax investors is whether they will see the strong quarter as a sign of things to come or a one-time aberration. Currently, investors expect somewhat slower growth rates of roughly 10% in both revenue and earnings for fiscal 2016, expressing some doubts about CarMax's ability to sustain its current pace. If the U.S. economy remains strong, though, the coming fiscal year could easily have an even better opportunity for CarMax to generate better results.

CarMax shareholders celebrated the strong quarterly results, sending the stock up more than 10% in pre-market trading immediately after the announcement. With so many positive factors going for it, CarMax has a good opportunity to keep driving its results higher into 2015 and beyond.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends CarMax. The Motley Fool owns shares of CarMax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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