Back on 11/26/2018, I posted here my detailed due diligence on Carvana.
https://discussion.fool.com/cvna-twlo-top-price-revenue-gainers-…
The OP and ensuing thread contain a lot of misinformation and incorrect data that need to be addressed as follows:
SaintCroix: Now let’s look at those growth rates…
2014: $37.9 million
2015: $53.8 million
2016: $85.7 million
2017: $131 million
2018: $144 miilion (first 3 quarters)
*That's right, they have a 50% plus revenue growth rate. In the used car industry.*
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From my Carvana post, here are the correct revenue numbers and YoY growth annually and quarterly that show beginning at Q1 2015, Carvana quarterly revenues at least tripled year-over-year for 6 consecutive quarters through Q2 2016, and, thereafter, at least doubled for 9 consecutive quarters through Q3 2018.
**MARKET NO. USED WHOLESALE NET Diluted SHARE**
**CARVANA CAP OF VEHICLE Change VEHICLE Change REVENUE Change INCOME EPS PRICE Change**
**FY/QTR ($M) MKTS UNITS SOLD YoY UNITS SOLD YoY ($M) YoY ($M) ($) ($) YoY**
11/21/18 6.300 B 41.68
Q3 '18 5.428 B 78 25,324 116.1% 4,408 145.3% 534.921 137.3% (16.042) (0.50) 38.75 164.0%
Q2 '18 5.818 B 65 22,570 111.3% 3,658 131.5% 475.286 127.0% (9.965) (0.41) 41.60 103.2%
Q1 '18 3.003 B 56 18,464 121.6% 2,342 81.8% 360.422 126.6% (7.043) (0.53) 22.93 106.6%
**FY 2017 2.606 B 44 44,252 135.9% 6,509 145.5% 858.870 135.2% (62.841) 19.12**
Q4 '17 2.606 B 44 13,517 141.4% 1,844 152.3% 265.053 148.1% (5.480) (0.45) 19.12
Q3 '17 1.949 B 39 11,719 133.3% 1,797 128.3% 225.379 128.0% (4.380) (0.29) 14.68
Q2 '17 2.718 B 30 10,682 145.3% 1,580 151.2% 209.365 142.0% (14.542) (0.28) 20.47
Q1 '17 23 8,334 120.3% 1,288 155.6% 159.073 118.1% (38.439) (0.28) 11.10
**FY 2016 21 18,761 187.6% 2,651 147.8% 365.148 180.0% (93.112)**
Q4 '16 21 5,600 155.5% 731 106.827 151.3% (35.694) (0.26)
Q3 '16 16 5,023 182.8% 787 98.844 177.1% (21.985) (0.16)
Q2 '16 14 4,355 224.3% 629 86.526 202.5% (18.108) (0.13)
Q1 '16 11 3,783 212.1% 504 72.951 237.7% (17.325) (0.13)
**FY 2015 9 6,523 209.9% 1,070 681.0% 130.392 212.8%**
Q4 '15 9 2,192 182.8% 42.514 200.7%
Q3 '15 5 1,776 206.7% 35.668 202.4%
Q2 '15 5 1,343 208.0% 28.607 202.8%
Q1 '15 4 1,212 284.8% 21.603 243.0%
**FY 2014 3 2,105 137 41.679**
Q4 '14 3 775 14.137
Q3 '14 3 579 11.795
Q2 '14 2 436 9.449
Q1 '14 1 315 6.298
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xSaintCroix: The used car industry is a massive, $7.8 trillion industry, in the U.S. alone. Last year that industry grew sales at 1.6 percent.
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$7.8 trillion must be a typo error. From my Carvana post, I provided the following data from the U.S. Census:
The U.S. automotive retail industry is gigantic as the largest retail trade sector in the U.S.
According to data in the latest available 2016 Annual Retail Trade Survey by the U.S. Census, the 2016 annual sales for the business of motor vehicle and parts dealers accounted for $1.144 trillion or 24% of the total $4.856 trillion retail sales in the U.S. as shown in the following table.
2016 Annual Retail Trade Survey
Estimated Annual Sales off U.S. Retail Firms by Kind of Business: 1992-2016
**ANNUAL RETAIL SALES in $ Billion 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007**
**TOTAL U.S. RETAIL SALES** 4,856.3 4,726.0 4,639.4 4,458.5 4,302.2 4,103.0 3,818.0 3,612.5 3,935.3 3,995.2
**MOTOR VEHICLE & PARTS DEALERS** 1,144.4 1,094.1 1,020.9 959.3 886.5 812.9 742.9 671.8 785.9 910.1
• % of Total U.S. Retail Sales 24% 23% 22% 22% 21% 20% 19% 19% 20% 23%
**TOTAL AUTOMOBILE DEALERS** 984.4 940.5 875.6 819.3 752.8 684.5 621.2 552.0 649.5 767.4
• % of Motor Vehicle & Parts dealers 86% 86% 86% 85% 85% 84% 84% 82% 83% 84%
• % of Total U.S. Retail Sales 20% 20% 19% 18% 17% 17% 16% 15% 17% 19%
**NEW CAR DEALERS** 877.7 842.1 785.1 735.4 672.6 608.8 549.5 486.6 575.6 687.7
• % of Total Automobile Dealers 89% 90% 90% 90% 89% 89% 88% 88% 89% 90%
• % of Total U.S. Retail Sales 18% 18% 17% 16% 16% 15% 14% 13% 15% 17%
**USED CAR DEALERS** 106.7 98.3 90.4 83.9 80.2 75.7 71.7 65.4 73.9 79.7
• % of Total Automobile Dealers 11% 10% 10% 10% 11% 11% 12% 12% 11% 10%
• % of Total U.S. Retail Sales 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%
**AUTO PARTS, ACCESS. & TIRE STORES** 90.5 89.3 85.8 85.0 84.1 83.0 77.9 74.2 76.3 74.7
• % of Motor Vehicle & Parts dealers 8% 8% 8% 9% 9% 10% 10% 11% 10% 8%
• % of Total U.S. Retail Sales 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%
With its e-Commerce platform, Carvana has seized the huge opportunity to disrupt the retail used car sector and attract more customers as it continues to grow its operations and expand into new markets.
As previously mentioned, the 2016 annual sales for the business of motor vehicle and parts dealers accounted for $1.144 trillion or 24% of the $4.856 trillion total retail sales in the U.S.
Carvana is in the fledgling e-Commerce business of motor vehicle and parts dealers, which accounted for only 2.8% or $32 billion of the aforementioned $1.144 trillion total.
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GrowthMonkey: One more point which I forgot to mention in my previous post is that so far, the CEO’s dad has allowed Carvana to use his auto dealership company’s (DriveTime) facilities/car refurbishing centres for FREE; and this has artificially reduced Carvana’s costs.
According to the Carvana !0K 2017, Inspection & Reconditioning Centers (IRCs) are leased, not free, as follows:
ITEM 2. PROPERTIES.
Corporate Offices . In September 2016, we entered into a lease agreement effective through February 2024 with the option to extend to February 2039 for approximately 134,000 square feet of office space for our corporate headquarters in Tempe, Arizona.
Other Facilities . The below chart summarizes our material facilities other than our corporate headquarters. We recondition, photograph and store inventory at our IRCs and provide customers with the option to pick up their purchased vehicles at certain facilities, including multi-story glass tower fulfillment centers that we refer to as vending machines. Each of the IRC facilities listed in the table below is leased. Each of the vending machines listed below, except for our San Antonio Vending Machine, is leased through an operating lease or a sale leaseback transaction accounted for as a finance transaction. Markets where we do not have an IRC or vending machine that can function as a logistics hub are not listed in the table below. Markets where the vending machine is under construction are not listed in the table below. In these markets we lease or sublease office and parking space to facilitate deliveries. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Markets.”
Operations
GA IRC, Winder, GA
NJ IRC, Delanco, NJ
TX IRC, Blue Mound, TX
AZ IRC, Tolleson, AZ
Jacksonville Vending Machine
Raleigh Vending Machine
Austin Vending Machine
Dallas Vending Machine
Houston Vending Machine
Nashville Vending Machine
San Antonio Vending Machine
Birmingham Fulfillment Center
Atlanta Fulfillment Center
JKB2016: Have a look at the debt situation at CVNA. Debt to Equity ration of 7+. KMX’s debt is primarily for the their finance of vehicles. Strong balance sheet at KMX.
What JKB2016 is alluding to is known in the auto retail industry as “vehicle floor plan financing” which is excluded in long-term debt/equity ratios as explained in one of my past post elsewhere:
https://discussion.fool.com/value-candidates-in-auto-dealership-…
Now, regarding all your debt comments, first of all, I am aware of the relationship between debt and ROE and how one can be manipulated to affect the other. I usually am debt adverse and look for companies with Total Debt/Equity less than 40%. However, high debt and high debt/equity ratios are justified givens in certain sectors like auto dealerships. I intend to look at other public auto groups and am almost fully convinced that all will have very similar debt profiles. Here’s what the LAD CFO reported in the last earnings call in July 2014:
At the end of the quarter, we had $28 million in cash and $84 million available on our credit facilities. Currently, $216 million of our operating real estate is unfinanced. These assets can provide up to an additional $162 million of available liquidity in 60 to 90 days. This brings our total liquidity to $274 million, and we’re being comfortable with our overall level of available credit.
At the end of June 30, excluding new vehicle floor plan financing, we had $260 million in [long-term] debt, of which $167 million is mortgage financing, $96 million is used vehicle financing with the balance on our revolver. We have no mortgages maturing until 2016, we have no high-yield bonds or convertible notes outstanding. We were in compliance with our debt covenants at the end of the quarter.
The excluded new vehicle floor plan financing are $806.7 million in floor plan notes (payable: non-trade) and $20.6 million in floor plan notes payable. What is floor plan financing?
Go to any large auto dealer and there are hundreds of cars on the lot. You may wonder how much the dealer had to spend to provide you with almost limitless choices. What you don’t realize is that, like most new car dealers, a floor plan was used to finance the cars. Simply, it is a way for an auto dealer to use a lender’s funds to finance the cars, and until each of them is sold, the lender holds title to the cars. The dealer then receives payment, hopefully including a profit, and remits the balance to the lender who, in turn, releases the title to the car to the new purchaser.
http://www.ehow.com/about_5065836_floor-plan-financing.html
So about 75% of LAD’s total debt of $1.10 billion are $827.3 million of floor plan notes. Almost all auto dealerships use floor plan financing which yield very high total debt/equity ratios. BTW, Lithia has the lowest ratio among the other publics in my original post.
In my Carvana post, I compare the Carvana capital structure with CARMAX and AutoNation and show Long-Term Debt/Equity ratios that exclude vehicle floor plan financing.
**CAPITAL STRUCTURE CARVANA CARMAX AUTO NATION CARGURUS**
Q2 2018 Q2 2018 Q2 2018 Q2 2018
Cash & equivalents $ 199.192 M $ 37.147 M $ 69.2 M $ 31.762 M
Working Capital $ 204.669 M $ 1,738.629 M $ (838.2 M) $ 113.735 M
Current Ratio 1.47 2.35 0.85 3.25
Long-Term Debt $ 76.873 M $ 840.187 M $ 414.5 M O
Stockholders’ Equity $ 359.109 M $ 3,482.118 M $ 2,369.3 M $ 156.391 M
LT Debt/Equity 21.4% 24.1% 17.5% 0%
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Finally, my Carvana post addressed its corporate management and Ernie Garcia II’s involvement as follows:
CORPORATE MANAGEMENT
In 2012, Carvana was co-founded by Ernie Garcia, III (Board Chairman, President & CEO), Benjamin Huston (Chief Operating Officer) and Ryan Keeton (Chief Brand Officer) with headquarters in Tempe, Arizona. Carvana’s top executive management team is relatively young, well-educated (primarily Stanford and/or Harvard), experienced and focused on disrupting and transforming the retail used car sector with their company’s custom-built business model and e-Commerce platform.
At present, the insider ownership is 21.41% with major shareholder Ernest C. Garcia II (the father of CEO Ernie Garcia III) holding 52,937,458 shares. Ernest Garcia II is a self-made billionaire (rank #127 on Forbes list of 400 of the the Wealthiest Americans with a real time net worth of $3.8 billion), who currently owns and runs DriveTime Automotive, the nation’s 4th biggest used car retailer.
https://www.forbes.com/profile/ernest-garcia-ii/#6fb2645e534……
[Here is some full-disclosure background about Ernest Garcia II’s remarkable rebound from failure to a self-made billionaire. In October 1990, Garcia, then a Tucson-based real estate developer pleaded guilty to bank fraud, following the failure of Charles Keating’s Lincoln Savings and Loan Association. Garcia "fraudulently obtained a $30-million line of credit in a series of transactions that also helped Lincoln hide its ownership in risky desert Arizona land from regulators.” Garcia spent three years on probation, and he and his firm filed for bankruptcy. In 1991, he bought Ugly Duckling, a bankrupt rent-a-car franchise, for under $1 million and merged it with his own fledgling finance company, and turned it into a company selling and financing used cars for sub-prime buyers with poor credit history. Fast forward 27 years, he’s now the nation’s 4th largest used car retailer. In 2002, the Ugly Duckling name was changed to DriveTime Automotive.]
Carvana was founded by Garcia’s son, Ernie Garcia III, as a subsidiary of DriveTime Automotive and was later spun out. This explains why Carvana, a Tempe, Arizona based company, chose Atlanta, Georgia as its first market to target and penetrate.
Initial Public Offering
On 4/28/2017, Carvana went public, pricing its shares at $15, ahead of the IPO. CVNA opened down at $13.50/share and closed its first trading day down at $11.10. On May 3, 2017, Carvana Co. completed its IPO of 15.0 million shares of Class A common stock at a public offering price of $15.00 per share. Carvana Co. received approximately $205.8 million in proceeds, net of underwriting discounts and commissions and offering expenses. Carvana Co. used the proceeds to purchase approximately 18.8 million newly-issued membership interests of Carvana Group at a price per unit equal to 0.8 times the initial public offering price less underwriting discounts and commissions. In connection with the IPO, Carvana Co. transferred approximately 0.2 million Class A Units to Ernest Garcia, II in exchange for his 0.1% ownership interest in Carvana, LLC, a majority-owned subsidiary of Carvana Group. After the transfer Carvana Co. owned approximately 18.6 million Class A units.
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In late December 2018 when the CVNA stock price dropped below $30/share, I added to existing positions in several family accounts.
As always, conduct your own due diligence and decision-making.
Regards,
Ray