The CarMax Hurdle (KMX, BRK.A)

This morning, Business Week in its "INSIDE WALL STREET" section has featured CarMax (NYSE: KMX) positively, mainly noting that Warren Buffett’s Berkshire Hathaway (NYSE: BRK/A) raised his stake by another half recently to 9.6%.  The article notes that this one only has a 2% market share and could become a Wal-Mart for cars, let alone it having some 28% earnings growth.  This also notes that while the $20.02 level (actually closed at $19.12 yesterday), leaves a 25% upside to Lehman Brothers’ $25.00 target.

We would note that Lehman doesn’t have the highest target out there, but it looks like the average price target is under $22.00.  The truth is that CarMax as a business does have a decent business model in that you can sell your car easily and you don’t have all the games on the car lot like you are dealing with gypsy horse traders.  But there is a real issue that very few really address here.  If you have ever gone out and price shopped CarMax as a buyer or as a seller, you might think twice.  The company has significantly higher priced cars than you can find elsewhere and its "guaranteed buy prices" leave a lot to be desired if you need to sell your car.

There is merit that you have an ease of the transaction here, and their cars do come with a quality assurance and some initial guarantees here.  It isn’t all bad.  But the cost differential is substantial.  There are many risks in buying and selling cars, but Business Week looks like it only did some Warren Buffett chasing here and very few have publicly addressed the key business issues at hand here.  If you don’t believe it, go to the lot after you have done real price comparisons as a buyer and a seller.  As a strapped U.S. consumer is looking for ways to save $1,000.00 per year here and there, this is an issue that needs to be considered.

Jon C. Ogg
February 29, 2008