CarMax, Inc (KMX): Buy This Auto Stock on any Dip

Finally, the market for the used car is back. The average American car is 10 years old. Unemployment is still above 7%.

Americans who can’t afford the $31,940 average sticker price of a new car in 2013 find a car from 0-6 years old a value that’s tough to beat. Fleet sales and so-called “program car” arrangements have picked up since the depths of the great recession, giving CarMax more inventory to move.

At only 118 dealerships and plans for many more, the company is set for years upon years of double-digit growth. Same store sales are growing at a 5% annual pace, which adds to margins as dealerships are a very high fixed-cost business.

Buying growth

CarMax, Inc (NYSE:KMX) intends to add 13 new stores in 2014, while forecasting new store openings of 10-15 stores in each of fiscal years 2014 and 2015. Given CarMax’s market share (estimates say the company sells less than 3% of all late-model used cars in the United States), there is ample room for expansion.

That leads to serious growth, perhaps as much as 10% per year from new store openings on top of 5% growth in same store sales. At that pace, CarMax is an extreme value at less than 20 times earnings.

CarMax, Inc (NYSE:KMX) is the only way to play a rapidly expanding market for used cars. Unlike car manufacturers that have exposure to Europe, and new car dealerships which are most exposed to new cars, CarMax is the only way to play a purely American rebound in used car sales – and the trend looks better than ever.

In used cars and stocks, buyers shouldn’t overpay. At 24 times last year’s earnings, investors should wait for a 20% correction to buy this growing auto player at a price sub-20 times earnings. Long-term shareholders will be rewarded for their patience.

The article Buy This Auto Stock on any Dip originally appeared on Fool.com and is written by Jordan Wathen.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends CarMax. Jordan 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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