CarMax Fourth Quarter Disappoints; Buyback Plan Increases
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CarMax Fourth Quarter Disappoints; Buyback Plan Increases
(KMX, $46.65, down $0.91 in early trading)
Used car retailer CarMax Inc. reported disappointing fourth quarter 2014 sales and earnings today. Analysts were expecting earnings per share (EPS) of $0.54, and the actual number came in at $0.44 — a large earnings miss — accompanied by a small revenue miss. However, CarMax was very pleased with their 7% same-store sales increase.
CarMax plans to repurchase $1 billion in stock, a move which should shore up its earnings per share growth rate, which is glaringly low in light of its high price-earnings ratio (PE). The company just completed its 2014 fiscal year in February, during which time they repurchased $306 million of stock.
- Investment lesson: earnings per share (EPS) are calculated by dividing the number of outstanding shares into the company’s net income. There are two ways to increase earnings per share: increase net income, or lower the number of outstanding shares. The EPS number is important because professional investors often have strict investment criteria, including EPS growth rates. If CarMax can find a way to increase its EPS, more mutual funds and institutions might buy and recommend the stock, thereby encouraging the stock price to rise.
Earnings growth projections have fallen since my Sept. 25 report on Ransom Notes Radio. Wall Street expects EPS to grow 9% and 10% in 2015 and ’16 (February year-end). The 2015 PE is 18.7, quite rich in light of the dramatically slowing earnings growth rate.
The stock hasn’t gained any ground in the last eleven months, mostly trading sideways with wide price swings. The price peaked at $53.08 in December 2013. KMX has traded between $44-$50 so far this year.
KMX has a neutral chart, unspectacular earnings growth, an overvalued PE, and a high 2013 long-term debt ratio at 64%. I would neither buy nor short this stock. Since there’s no logical reason for the stock to go up, I would sell, and move on to a company with strong earnings growth and a bullish chart.
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