Tickers in this Article: KMX, AN, SAH, F, RUSHA, GNTX, AAP
With the valuation that used-car superstore operator CarMax (NYSE:KMX) sports, high-octane growth is a must. Fortunately, the company is delivering, though the immediate reaction to Thursday's earnings report suggests that once again investors built their expectations to a level that would be almost impossible to please.

A Full Throttle Fourth Quarter
Just as the company did in the November quarter, CarMax delivered revenue growth of 23% for this fourth quarter. The details were a little different, though, as comp store growth trailed off just a bit. "Trailed off" is a very relative notion, though; comp store growth of 12% is nothing to apologize for, nor is the 14% growth in overall used unit sales.

Profitability was solid as well. Gross margin slipped a bit (only about 30 basis points) from last year, and improved slightly on a sequential basis. On a per-unit basis, gross profit increased by about 6%. The company delivered solid operating leverage, and operating income rose about 16%. Operating margin clearly lost a bit of steam, but not to a significant degree and some of that can be chalked up to accounting changes in the auto finance side of the business. (For more, see CarMax Suffers For Investors' Over-revved Expectations.)

The Road Ahead
Like any seller of big-ticket items, CarMax has to be worried about the health of the consumer and the health of banks (the company finances about one-third of its vehicle sales). Granted, used cars are relatively more attractive in periods where customers do not feel so confident, and that is worse for car sellers like AutoNation (NYSE:AN) and Sonic Automotive (NYSE:SAH), but selling used cars hardly makes the company immune to the health of the economy.

On the positive side, there is lot of room to grow. Who knows what the saturation point is for used car superstores, but it likely is well north of the 100-odd stores that CarMax currently operates. That expansion opportunity will keep a lid on near term free cash flow generation, but it really is about investing in the future - creating a leveragable asset base with a durable brand and economies of scale.


The Investment Case
Are there any bargains left in industries tied to autos and trucks? CarMax has jumped about 38% in the last year and sports an EV/EBITDA ratio above 17% (though also a high single-digit return on assets and good growth). Ford (NYSE:F) has outpaced the market over the past year (up 18%) and carries a lower multiple (9.5-times), but the returns on capital between the two businesses are very different.

Likewise, parts companies have enjoyed a good run -
Gentex (Nasdaq:GNTX) is up 53% and Autoliv (NYSE:ALV) is up 43% (though only sports a trailing EV/EBITDA of 5.7-times). Auto parts retailers? AutoZone (NYSE:AZO) is up 58%, and Advance Auto Parts (NYSE:AAP) is up almost an identical amount (and the companies are close in returns on capital as well).

Maybe commercial truck dealer
Rush Enterprises (Nasdaq:RUSHA) is the relative bargain? The rebound in commercial truck sales has been very strong, but Rush is only at about two-thirds of its prior peak sales level. That could be worth another 50% to the stock if sales rebound to that level and the sales multiple stays basically consistent. (For more, see Auto Stocks For 2011)

The Bottom Line
CarMax strikes me as the sort of stock that is great to own and hard to buy. Generally speaking, it is hard to pay the premium that CarMax shares carry over and over again, and make good long-term returns in the market. On the other hand, selling a stock growing more than 20% just because the valuation looks high right now is a great way to miss a lot of the 5- and 10-baggers.

Consequently, CarMax is a company and a stock that I would like if I already owned it, but would only put on the watch list otherwise, though I'm fully aware that others will continue to pile in irrespective of the price, and the shares may never get "cheap" during the growth phase of the company. (For more, see Analyzing Auto Stocks.)

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