KMX - Down about 16%

Investing Strategies Falling Knives
1

Down ~16%.

  • Revenue up very slightly, well below expectations.
  • Units sold decreased about 6%.
  • Net profit down substantially. Increased costs, increased interest expense, increased on loan loss provisions decreased income quite a bit.

The great news: Carmax believes they are still growing market share in the 0-10 year old vehicle space.

Seems like this might be some temporary bad news.

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Definitely bad news, but I’m not sure the haircut is proportional. I will be taking a closer look today.

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Would love to hear Jim’s thoughts on KMX. :frowning:

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A quick look at their earnings announcement shows a couple of things to be concerned about. First, they increased their loan loss provisioning by $40 mil in the quarter. That accounts for a chunk of the earnings miss. Second, it’s a huge $15+ billion loan portfolio in a rising interest rate environment. I suspect we should see more loan loss provisioning in the coming quarters, as well as a decline in earnings on those loans. Third, compensation expenses have been exploding. Compensation and benefits excluding share-based compensation increased 34% last year, and increased a further 16% in the first six months of this year. Finally, both used and wholesale unit sales have been declining. Fortunately revenue per unit is increasing so overall revenue growth continues.

For me, it doesn’t look like Carmax is broken, but costs and financing bare watching. I will likely engage in tax loss harvesting but would like to keep a core position going forward. The question is do I buy now and do the tax loss selling in a month, or sell now and buy back before year end?

PP

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PP, I read your comments about the loan book and debt and I think this is quite a key factor.

I assume the loans on cars are typically at a fixed rate for the duration of the loan. I guess there’s some debt used (at least in part) to fund this; do you know by how much that debt is impacted by rate rises? I.e. could Carmax end up in a squeeze where they’ve lent at low, fixed rates and are borrowing at variable rates that are increasing? And hence how susceptible is Carmax to substantial negative cash flows on the loan book?

– David

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Well, these shorter term KMX trends make for good options trading;

Sold KMX $100 calls in late August for $5; just bought them back for $.80.

Will rinse and repeat if events create the opportunity. and otherwise hold the existing KMX position for the longer term.

Cheers!
Murph
BL Home Fool
(long KMX)

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That seems like a wise decision, wish I would have done the same!

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I sure hope Mungo comes over to the new boards.

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According to the people who have talked with mungofitch, he has decided to leave the TMF boards.

Very sad, but I wish him all the best in life for the more than 20 years he educated and helped us all.

Cheers!
Murph
BL Home Fool

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Apparently said2 has been in private communication with mungofitch. According to what said2 has posted, at least part of Jim’s problem is a technical issue with the new board where he sees it as read-only, can’t log in, his ‘private’ emails post as public etc. He may have other constraints, e.g. on his time, but if there’s a technical issue that is a contribution to his decision, then let’s see if that issue can be addressed.

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Look on the Mechanical Investing board for more info on this technical issue

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