CarMax: Random thoughts... Running thread

Manheim publishes the sales trends and maintains an index. Below is the latest quarter presentation.

here is the used vehicle Index

So you are looking for another one to two quarters of falling prices. As the falling prices flows through the inventory, sales, in another 2 to 3 quarter things will normalize from the inventory and sales point of view. I don’t know what is the lag for the default rates to show up from sales, I would like to see the default rates of cohorts from Jun 2021 with 2018, 2018 or prior period to see how the price impacts default rates and if we can overlay economic condition on top of that, would be awesome.

Ignoring the default rates, KMX stock should be forming bottom soon.

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I didn’t get to look into the earnings, from headline the EPS miss is pretty bad. I guess this was expected in the last week or so, because suddenly option premium were raising, showing a bigger move is expected out of earnings. I have sold some Jan 23 $40 Puts, and I will be closing them today, take the profit move to sidelines and wait. The used car prices started to fall, but we still have some ways to go to get back to normal levels. I think the bottom for KMX should be very close, may be another 1 or 2 quarters.

This is bit old news, but gives you an idea of where the used car prices are. An average used car price of over $30K??? What are those folks thinking? You can buy a good new car for that price.

Used car prices at last saw first decline of this year. It has long way to come down to get back (to mean revert). Let us assume the price declines gently over 18 to 24 months, what this will do auto-loans and same store volume? I guess the current price is rich, in any case, my deep in the money covered call is safe.

The price drop is every so slow. Whenever I see this, how much COVID has changed/ impacted economy and our lives. Will we ever go back to pre-covid levels? If so, what kind of hardship it will unleash on middle-class, and poor people? You are not going to go back to pre-covid levels without draining all that money poured in to the system and it is going to create havoc.

Ticked a bit low… The pleasure of watching paint dry :joy: :joy: Other than pickup all other segments price are down Y-o-Y. This prices has to go down a lot to mean revert. I expect another year of declining price.

The used car prices dropped by 2.2% in October. Also, the interest rates have gone up for financing. The price drop could be seasonal, if the price drop continues, along with interest rates, dealers end up carrying inventory that is losing its value and paying double digit interest to finance it. Already a mini fire sale on used car and even new car sales is underway. Of course carmax has a very enviable unit economics. If there is a carnage, KMX may be the last man standing and they can get back to $2000+ gross margin per car.

A good entry price is needed for some stocks to be a great investment.

Wedbush analyst Seth Basham in a research noted…

A phase of higher defaults on auto loans may be starting, which would be bad news for CarMax.

CarMax Auto Finance reported “securitization trust data for the month of October. Based on our calculations, the portfolio-level delinquency rate spiked,” he wrote. “With 2022-1 through 2023-2 vintage securitization delinquency and loss curves breaking out, and macro loan performance drivers such as the job market slowing, we see potential for higher loan loss provisions in F3Q.”

Affordability may be an issue. According to Edmunds, 17.5% of buyers who financed a car in the third quarter had a monthly loan payment of $1,000 or more. The average payment was $736, a record high.

The Nov mid-month Manheim Used Vehicle Value Index declined to 206.1, … The seasonal adjustment reduced the decrease. The non-adjusted price change in the first half of November dropped 2.3% compared to October, while the unadjusted price was down 6.9% year over year.

While the price is declining we are still long way from getting back to the trend-line.

I was shocked to find CVNA unit gross profit… Compare this to KMX, I think I should have picked up CVNA as a lottery ticket when it was below $10

Still a long way to go mean-revert. I am not seeing it is going to get there in a hurry, meaning KMX will move sideways until the decline stabilizes, at least that is my theory. Separately used car prices have to decline to arrest the soaring auto insurance costs. In states like CA, it is very difficult to find anyone writing auto insurance. I should have bought the Insurance companies specifically Progressive. I looked at them at one point, but failed to pull the trigger. :frowning:

below is the 5 quarters and 5 year selected lines from the income statement. Still the COGS is much higher compared to historical trend. I assume, as the COGS comes down, it directly falls to the bottom line.

Column 1 CVNA KMX Column 4
Market Cap 16.7 12.5
Debt 6.3 19.2
Total Enterprise Value 23 31.7
Long-term Notes Receivable 17

CVNA’s market cap is far higher than KMX, while one can argue the valuation is wrong etc, setting aside, the way I see is market is expecting CVNA to grow much faster than KMX and will generate more profits.

Separately KMX has a huge financing company inside it.