KMX

Interesting chart, watching to see if the double bottom holds. With car prices supposedly coming down, perhaps that is a negative?

https://finviz.com/quote.ashx?t=KMX&ty=c&ta=1&p=…

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With car prices supposedly coming down, perhaps that is a negative?

The market frequently believes that. They’re generally wrong.

That’s because Carmax is more of a “flow” business.
They do hold some inventory on any given day, but to a first approximation they make a certain amount per car in a given year whether prices are high or low.

A while back the stock price took a dip because used car prices were rising and the narrative was that they couldn’t get the inventory they need.
The mood goes up and down, the price goes up and down.

At current prices under $90 I’d buy more but I probably have enough.
It’s my second biggest position. (tied)

I don’t believe that Carvana is going to put them out of business with their online-only approach.
The valuation appears to be a fair bit cheaper than usual for the firm on smoothed cash flow or earnings.
I believe that EPS will rise at double digit rates in the next few years, or not miss that by much.
That combination suggests a good outcome.
However I also believe in the tooth fairy, so buyer beware.

Jim

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Happy 21st Foolish Anniversary, mungofitch!

I guess that means you are old enough to…? :wink:

Cheers!
Murph
BL Home Fool

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Here is another way to play KMX, for those so inclined:

Let’s say you wanted to tie up $50K for this KMX investment. You would sell 6 contracts of the KMX 90 October Put (6.7/7), let’s say you can get $6.8 for the settle (70% of the distance between the bid and ask).

You immediately receive $4074, and you need to have available $49926 in case KMX drops below $90 on the 21-Oct-2022 (59 days from now). That is 8.16%, or annualized roughly 52%. If the price closes on or above $90/share on the expiration date, you make your full 8.16%, and if the price is above $96.7 you would have been better off just buying the stock.

Note that there is always the opportunity to buy it back early or roll it outwards if you so desire. Suggestion is to hold until the annualized return is less than 5-10% and close the position then.

–G

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Here is another way to play KMX, for those so inclined: … sell 6 contracts of …

Though it’s a strategy that I’ve used a lot, it’s a strategy that works best when you aren’t of the opinion that something is a truly great buy at the moment.
After all, if there is a decent chance of a very nice outcome reasonably soon, then a strategy that caps upside may not be the best one.
It works best for things that are cheap enough to be a passable long candidate, but that either

  • You really only want it if it’s that little tiny bit cheaper, or
  • you don’t think the price is going anywhere much any time soon, but the premiums are decent anyway.

I bought deep in the money calls, which suits the reverse situation: when you think there is a decent chance of a biggish return reasonably soon.

Jim

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The problem that I am getting with the DITM calls is that the (uncallable) effective margin rate is very high. For example, if I purchase the:

KMX 45 Jan 2024 CALL 49.5/50.7 it has an effective margin rate of 9.6% and an effective leverage of 1.8 (at least if my spreadsheet is correct). KMX would have to rise to 95.40 to break even.

Just to make sure my calcs are correct, given a closing price of $90.34, we have an intrisic value of $45.34, and a time value of $5.36 (assuming I buy it at the ask of $50.7). Thus I am effectively borrowing $39.64 (current price - ask), and my margin rate is the time value over the borrow scaled to the number of days to go (514). So [1+(5.36/39.64)]^(365/514) - 1 which gives 9.42%.

Strikes me as a bit much to pay on the margin side.

Did I make a mistake here?

–Gabriel

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KMX 45 Jan 2024 CALL 49.5/50.7 it has an effective margin rate of 9.6% and an effective leverage of 1.8 (at least if my spreadsheet is correct). KMX would have to rise to 95.40 to break even.

I get 9.62%, BE 95.70, 1.78X leverage, at the 50.70 ask.

FWIW, the largest open interest (25, LOL) is the 60 strike, I get 12.00%, 2.32X, BE 99.00

Seems quite expensive to me.

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With car prices supposedly coming down, perhaps that is a negative?

In retail, year over year comparisons are big deal. So in 2 months, used car price comparisons will look better, i.e., the current used car prices will be lesser than one year ago and that trend will run for sometime possibly a year plus.

For reference, the yearly average before pandemic hit was 139, and today it is 211 and a peak was around 236.

Of course, prices going down means it could help sales, but revenue, at the top line could come down. While per unit profitability may be the number to really care for, some headline driven risk to the share price is there.

I think any such dip may be an opportunity to buy.

While per unit profitability may be the number to really care for, some headline driven risk to the share price is there.

I think any such dip may be an opportunity to buy.

Here is an interesting piece I saw on Morgan Stanley’s research note:

Besides temporary shocks in Oct/Nov 2008 (GFC) and April 2020 (Covid), we haven’t seen a true used car downturn in nearly 20 years.

If you see below graph, you can see how elevated used car price index is. When it normalizes assuming that will not have an impact on KMX is difficult argument. I think we should expect some hit on the KMX share price.

https://docs.google.com/document/d/1wO-qXpHomUhWcuQqykCUy8E2…

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When it normalizes assuming that will not have an impact on KMX is difficult argument. I think we should expect some hit on the KMX share price.

Perhaps. Although if sales volume increases as prices (and inventory) revert to less extreme conditions, net profit could well increase.

Speaking as N=1, we’re holding on to our 2009 car until inventory improves.

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In new cars, if manufacturing efficiencies are moving forward quickly, even with declining new car prices, margins can grow substantially.

But for that to happen in any car company, they must do innovative engineering and reduce the number of parts, number of robots and number of line workers like crazy.

Some car companies are engineering rapidly as we speak.

Without naming Tesla, does anyone know of other companies making massive changes in the way thst they make parts and assemble cars?

Perhaps BYD is doing stuff like that. The other Chinese companies are doing similar things. But am unsure about how companies who are not doing that now can protect or grow margins as they compete with lower prices.

Any ideas about Toyota, VW, Stellantis, Ford or GM.

Engineering can really help manufacturing compete.

The Chinese are pushing rapidly as is my favorite company.

Just asking if anyone has researched their favorite car companies?

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Saw this on Seeking Alpha:

https://seekingalpha.com/article/4539303-carmax-the-right-bu…

Excerpt:

“Per the FY22 annual report, we know CarMax sold 1.6 million vehicles from March 2021 to February 2022 and they had net sales of $31.9 billion for the year. The breakdown was 924,338 used vehicles at retail plus 706,212 wholesale vehicles. In his letter to shareholders in the FY22 annual report, CEO Nash said they have raised long-term targets for FY26 such that they are targeting unit sales of 2 to 2.4 million and revenue between $33 and $45 billion.

The 1Q23 quarter through May 2022 gives us a glimpse into the future as we get past the pull-forward numbers experienced during the COVID pandemic. Per the 1Q23 call, 11% of retail sales were online and 54% of retail sales were omni-channel in the quarter; both percentages should rise in the long run. Relative to 1Q22, 1Q23 sales were down 11% and unit comps were 12.7% lower. The 1Q22 quarter was a tough comp as there were substantial stimulus benefits in the prior year including the biggest stimulus checks in March 2021. Despite challenges in 1Q23, CEO Nash said the following in the earnings call:

“Based on external data, we gained share each month from January through April, the latest period for which title data is available. We believe this share gain reflects the strength of our business model and omnichannel platform, which gives us the ability to successfully manage through cycles like this one.””

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