Saturday, December 22, 2007

A Trade on CarMax (KMX)

Dear fellow options traders :

Noted that CarMax (ticker : KMX), which operates as a retailer of used vehicles in the United States, would be reporting its Q3 earnings on 19 Dec 2007 before market opened.

From Feb 2007 till now, investors have experienced the market going up and down from the credit crunch due mainly to the subprime mortgage crisis. Over the past few months, we've also witnessed investment banks wrote-off billions of bad debts tied to subprime mortgages exposure which have, sadly, led to the resignation of a number of CEOs from a few investment banking companies. With the dark clouds of the credit crunch looming and inflation kept creeping up, in particular the price of crude oil, I felt that CarMax (KMX) might encounter a challenging 3rd quarter if consumers were unwilling in spend in such an economic environment.

Since CarMax also make loans to car buyers, I was also concerned that consumers might shun away from any types of loans due to the widespread default of mortgages.

I've read that in the Q2 earnings quarter conference, CarMax CEO reported that sales were slowing down but margins were on the rise!! This was a bit different from what he mentioned a few days ago in an investors' conference that CarMax intended to trade margins for market share. I was thus cautious how the margins-for-market share plan would be executed in the Q3 earnings quarter.

I've also read in an analyst report that industry-wide demand for new cars has been very weak all year. This would create a spill-over effect on demand for late-model used cars. Slow traffic continued to create headwinds for CarMax (KMX) retail sales as well as trade-in/appraisal offer volumes. Same-store sales in Q3 and probably in Q4 were projected to be negative.

With an understanding that CarMax (KMX) doesn't have a big gapping range after earnings, I bought a just in-the-money (ITM) Dec 22.50 Put option for $170.00 per contract on 18 Dec 2007 when KMX was trading around $21.50.

On 19 Dec 2007, CarMax (KMX) reported Q3 earnings of $0.14 per share, $0.03 worse than the consensus of $0.17; revenues rose 37.2% year/year to $1.89 Bln vs the $1.89 bln consensus. Co issued downside guidance for FY08, expecting EPS of $0.87-0.93 vs. $0.95 consensus, prior guidance $0.92-0.98. CarMax Auto Finance was being negatively affected by the unstable credit mkts, making it harder for the company to profitably fund its receivables through the asset-backed commercial paper market. In the near-term, the uncertainty in the credit markets as well as the challenging economic environment would continue to cloud the earnings outlook for CarMax.

The share price of KMX gapped down -$1.20 to $20.47 on 19 Dec 2007 when market opened. The share price attempted to move up during the conference call. Listening to the conference call while at the same time observing the chart pattern, trading volume and Level II code activity, I noticed the share price started to dip when the car loans were mentioned, I sold my options position for $230.00 when KMX touched $20.40.




You might want to take note that Mr Warren Buffet have bought shares of CarMax after last quarter's report. He might have seen value in the company and confident that the company would turn around when the economic conditions improve.

I would like to also take this special festive occasion to Wish You and Your Family a Very, Very Special Merry Christmas. I sincerely wish that You would have a Prosperous & Profitable Options Trading Year in 2008 (and beyond!!). Good Luck, Everyone : )

Yours Truly,

Tony Chai
Options Trading Resources

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5 comments:

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Tony Chai said...

Hi Shirley :

Thanks for your encouragement.

I hope you would succeed in whatever you pursue.

Take Care,

Tony Chai
My Options Trading Blog

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Tony Chai said...

Hi StockTube :

My Best Wishes to You Too, Buddy.

Best Regards,

Tony Chai
My Options Trading Blog