CarMax Pulls Out of a Tailspin

When used-car retailer CarMax (NYSE: KMX) reported its fourth-quarter earnings, featuring profits down 10 percent from 2006 levels, the stock rose. (The earnings drop was blamed on the company's CarMax Auto Finance unit, which lost $1 million last quarter.)

So what's going on? Well, CarMax has decided to sacrifice profit margins for now, to secure sales and steal market share from rivals. So if you're investing for the long haul with CarMax, you need to focus less on profits and more on whether CarMax achieves its twin goals of growing sales and share.

Here, then, are the reasons that CarMax's share price deserves its recent upshift: CEO Tom Folliard says that sales were "stronger than we anticipated" on consumer traffic described as "healthy." Having promised a 2 percent rise for the year, CarMax in fact delivered 3 percent growth for both the fourth quarter of 2007 and the year. And in case any doubts remain as to what that means, Folliard assured us that CarMax "continued to gain market share in the latemodel used-vehicle market."

CarMax does seem headed in the right direction, so you might want to keep an eye on it. Bullish investors are in good company: Warren Buffett's company owns a big slug of CarMax stock, and our own Motley Fool Inside Value newsletter service has recommended it, as well.