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Core Concepts: Gear Up With Auto Retailers

 

Consumers understand the value proposition of buying an almost-new, one- or two-year-old used car vs. buying a new car. Until the CarMax model came along, consumers didn't have an easy, efficient way to buy and sell their cars. CarMax offers no-haggle, fixed prices on all of its cars. And CarMax will pay you cash for your used car (a no-haggle offer), whether you buy a car from the company or not.

At the typical used-car dealer, the sales representative is paid a percentage of the profit on each car deal. The incentive is clear: Take care of the dealer by maximizing the dealer's profit. At CarMax, the sales rep is paid a fixed rate for every car sold. A CarMax rep's incentive is different: Take care of the customers by helping them to find the car they want, at the price that they are comfortable with.

Plus, CarMax offers a good selection; its lots have four times the inventory of a typical used-car dealer. CarMax reps have access to the company's entire inventory via CarMax.com. That's 20,000 cars to choose from.

By my calculations, this company will be worth more than $100 per share in three to four years. It recently traded at $53. However, my calculation of value will be adjusted to $50 per share after the company's 2-for-1 stock split in March. CarMax will begin trading on a split-adjusted basis on March 27.

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At time of publication, Alsin and/or ACM was long CarMax and Home Depot, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor, and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.

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