CarMax, Inc (KMX): A Defensive Investment In The Auto Industry

While the company appears cheap at just 11.7 times TTM earnings and excellent growth is projected over the next three years, proceed with caution. General Motors still has a ways to go before the market will be convinced that its turnaround is for real. When a company that is projected to grow its earnings by more than 20% annually going forward trades for a valuation like GM’s, it’s usually for a reason. Don’t get me wrong, I think General Motors Company (NYSE:GM) is a steal right now, but it is the riskiest of the three companies mentioned, by far.

AutoZone: The Stable Choice

AutoZone, Inc. (NYSE:AZO), on the other hand, may turn out to be the most stable. Despite how many new cars GM sells (or doesn’t sell), or how many used cars CarMax, Inc (NYSE:KMX) sells, there will always be a market for parts and accessories. The largest auto parts and accessories retailer in the U.S., AutoZone has more than 5,000 stores, and has recently stepped up its international efforts, with their first store in Brazil now open.

AutoZone, Inc. (NYSE:AZO) trades at a relatively low valuation of just over 15 times TTM earnings, which the consensus of analysts projects will rise at about 14% for the next few years. These numbers do look good, and with the aging American vehicle population, AutoZone should thrive for years to come.

What’s The Best Way to Play the Sector?

The best way to play the sector depends on your particular risk tolerance. For safety, AutoZone is probably the best, while GM has the best growth potential out of the three. For a good blend of growth and stability, and exposure to an aspect of the auto industry that works in both good times and bad, take a look at CarMax, Inc (NYSE:KMX), which should thrive for the next several decades, no matter what the overall market or economy does.

The article A Defensive Investment In The Auto Industry originally appeared on Fool.com and is written by Matthew Frankel.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends CarMax and General Motors. Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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