Investors Show Mixed Sentiment on CarMax

CarMax Inc. (NYSE: KMX) shares traded sharply lower Tuesday, but some investors remain confident in the company. The virtual dealership continues to face difficulty in the used-vehicle market largely due to aggressive incentives from new-vehicle manufacturers. These declining values and ongoing weakness in the overall economy has hurt top-line growth while higher funding costs at the CarMax Auto Finance division is eroding margins at the bottom-line.

Analysts also remain bearish on CarMax’s future prospects. Pali Research maintained their “sell” rating on the company while reducing their price target to $8 per share. The analyst mentioned that there are concerns that need to be addressed related to the auto loan securitization potential of the company’s CAF division. As a result, the conditions for the company are likely to continue to be significantly challenging going forward.

Some investors remain confident in CarMax despite these short-term problems. CarMax remains the nation’s largest retailer of used cars and counts Warren Buffett among its shareholders, who owns a $302.2 million stake. Bulls believe that the problems facing the company are temporary with the underlying fundamentals remaining in tact. The company is also taking actions to reduce costs by cutting their work force and streamlining their operations.

Investors who are confident in CarMax’s future, but reluctant to commit a lot of capital may want to consider long-term options. The January 2011 calls may represent the best opportunity. For under $300, investors can purchase the right to acquire CarMax shares at $10 anytime between now and January 2011. That leaves a lot of room for a recovery and allows investors to risk only $300 or less on the bet instead of purchasing 100 shares for $1,000 at today’s prices.

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