NEW YORK (

TheStreet

)

-- CarMax

(NYSE:

KMX

) has been downgraded by TheStreet Ratings from buy to hold. The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels and growth in earnings per share. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow, generally poor debt management and disappointing return on equity.

Highlights from the ratings report include:

  • KMX's revenue growth has slightly outpaced the industry average of 6.5%. Since the same quarter one year prior, revenues slightly increased by 9.8%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • CARMAX INC has improved earnings per share by 5.1% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, CARMAX INC increased its bottom line by earning $1.81 versus $1.67 in the prior year. This year, the market expects an improvement in earnings ($1.94 versus $1.81).
  • After a year of stock price fluctuations, the net result is that KMX's price has not changed very much. Although its weak earnings growth may have played a role in this flat result, don't lose sight of the fact that the performance of the overall market, as measured by the S&P 500 Index, was essentially similar. Looking ahead, our view is that this company's fundamentals will not have much impact in either direction, allowing the stock to generally move up or down based on the push and pull of the broad market.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Specialty Retail industry and the overall market on the basis of return on equity, CARMAX INC has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
  • Net operating cash flow has significantly decreased to -$59.74 million or 1229.24% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

.

CarMax, Inc., through its subsidiaries, operates as a retailer of used vehicles in the United States. It also sells vehicles that do not meet its retail standards to licensed dealers through on-site wholesale auctions, as well as sells new vehicles under franchise agreements. The company has a P/E ratio of 16.1, equal to the average specialty retail industry P/E ratio and below the S&P 500 P/E ratio of 17.7. CarMax has a market cap of $6.58 billion and is part of the

services

sector and

specialty retail

industry. Shares are down 4.9% year to date as of the close of trading on Friday.

You can view the full

CarMax Ratings Report

or get investment ideas from our

investment research center

.

-- Written by a member of TheStreet Ratings Staff

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