How CarMax Could See Used Car Profits Grow

Used car giant Car­Max got a mixed review for stock­hold­ers from The Mot­ley Fool’s Alex Planes. Rev­enue over the past three years got a pass­ing mark with its 51% increase, but improv­ing prof­it mar­gin didn’t make the cut. Here’s what the ana­lyst sees as strong poten­tial for Car­Max – and like­ly for oth­er grow­ing used vehi­cle retail­ers…..

  • Car­Max has plans to become a direct sub­prime auto loan orig­i­na­tor through its own financ­ing arm, which could increase prof­it mar­gins.
  • CarMax’s pilot pro­gram for sub­prime lend­ing could become a major rev­enue dri­ver. Sub­prime loans make up about 18% of CarMax’s rev­enue.
  • Car­Max makes up 2% of all used vehi­cle sales in the US and its earn­ings per share are expect­ed to grow 10% per year over the next few years. Car­Max has plen­ty of oppor­tu­ni­ties to cap­i­tal­ize on its mar­ket strength.
  • Strong same-store sales growth is deliv­er­ing its ben­e­fits in brand recog­ni­tion, inven­to­ry vari­ety, and geo­graph­i­cal foot­prints. Launch­ing three new super­stores in the third quar­ter of 2013 has paid off; there will be anoth­er 14 of these super­stores open­ing up in 2014 – includ­ing new mar­ket pres­ence in Port­land, Reno, Rochester, and Spokane. That store open­ing plan will con­tin­ue – 10 to 15 new stores per year for the next few years.
  • Cer­ti­fied used vehi­cle sales bode well for Car­Max; 55% of new-car buy­ers are open to con­sid­er­ing used cars if they’re cer­ti­fied, accord­ing to a recent sur­vey by AutoTrader.com.
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