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CarMax Vulnerable to Wall Street Woes?

As the sub-prime lending crisis engulfs Wall Street, investor fear is radiating throughout the entire financial services sector, battering down stock prices of companies like CarMax Inc. with no direct exposure to mortgage loans or even to the high-finance world of Manhattan. CarMax shares dropped briefly yesterday on worries that troubles in the lending industry might impact the used car dealer's financing division, although the stock ended the day close to its opening price.

Reports the Associated Press :  Scot Ciccarelli of RBC Capital Markets pegged CarMax as the retail company that could be most hurt by reduced credit availability. While the government's takeover of Fannie Mae and Freddie Mac has helped improve mortgage rates, the spreads on most other debt has risen significantly. And that could hurt CarMax's wholly owned financing business.

"We suspect this impact could cause further pressure on CarMax's CarMax Auto Finance income which has become increasingly critical since our estimates now assume that CarMax Auto Finance will account for an estimated 56 percent of CarMax's operating fiscal year 2009 profit," Ciccarelli wrote in a note to investors. The financing division could become a money-loser if current credit conditions continue, he said. If CarMax were forced to scale back the growth of its car-financing portfolio, that could further hurt used car sales.