This week’s Stock of the Week is selling cars in a simple and effective way.

Driving Profits

CarMax, Inc. (KMX) is the largest seller of used cars in the US. The company’s focus is on simplicity for consumers—very large vehicle selection, no-haggle pricing, an easy return policy and on-the-spot financing.

CarMax has nearly 200 locations now and will likely grow to 300 over the next five to seven years. Equally important, it is exploring non-store-based car selling as consumers move toward vehicle buying online. Within the next year, CarMax buyers will likely be able to shop and buy online and go to a store just for pickup—or even have the car delivered.

About 70% to 80% of sales at CarMax are financed, and financing is quite profitable, so rising interest rates could negatively affect the company as buyers start to delay purchases. And major weather events, such as hurricanes and floods, can depress revenue because while storm damage to vehicles might raise demand for used vehicles, that same damage reduces the inventory that CarMax can acquire. However, none of this will likely be a long-term negative for CarMax, whose revenue in fiscal 2018 was $17.1 billion—a figure that will likely grow to $18.6 billion in fiscal 2019 and $20.5 billion in fiscal 2020.

Fiscal year: February. Earnings per share: 2020 est./$5.20…2019 est./$4.70…2018/$3.60.

David S. Rainey is co-portfolio manager of the $2.2 billion Hennessy Focus Fund (HFCSX), Novato, California.

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