Money Matters - Simplified

CarMax Shares Plunged: What You Need to Know


Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.


What: Shares of used car seller CarMax (NYSE: KMX) were sputtering in intraday trading, losing as much as 10% after the company reported its third-quarter results.

So what: The numbers at CarMax actually looked darn good. Sales were up 23%, and comparable store sales showed an impressive 16% increase. Though earnings per share were reported as gaining just 9%, if you back out one-time adjustments in the company's finance division from the year-ago results, you get a much more robust 50% jump. The $0.36 in per-share earnings also waltzed past Wall Street estimates.

Now what: So what gives? Why the sinking shares? There are no two ways about it. CarMax is a pricey stock right now. For consumers pinched by the recession, buying a used car from CarMax may be a bargain, but with the stock trading at more than 20 times expected fiscal 2011 profit, there's nothing bargain-priced about it. I have no idea what investors might have been looking for this quarter to justify the price tag, but they obviously didn't get it. CarMax is a fine company, but investors may want to sit this one out until they can get a better price.

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