There was a flurry of posts about KMX about a month ago. Anyone finding this compelling now that price is below $85 and at 52 wk low?
Looks like a great entry point. I bought some back in June, down ~13% at the moment.
If I were deploying more money at the moment, it would definitely be high up on my list of potential targets. I’ve not read anything that leads me to doubt their business prospects in the intervening months.
“If I were deploying more money at the moment, it would definitely be high up on my list of potential targets. I’ve not read anything that leads me to doubt their business prospects in the intervening months.”
Agree. I added more in late August and feel like it is good value here having digested Jim’s informative posts, earnings and a few write ups. Markel folks were also very complementary of KMX when the topic was brought up in Omaha and they too are based in Richmond. I suspect patience will pay off but when- who knows?
At last, used car prices are declining. It has some ways to go. If the used car prices are going down, gross margin, net margin may experience pressures. Stock price may perform independently. However, I would like to see the used car prices stabilize and where the margins settle.
I am in no hurry.
Appreciate the posts. FWIW, this is Dataroma's activity on KMX in the most recent quarter: Q2 2022 Shares %chg = Wallace Weitz - Weitz Value Fund Add 13.21% 35,000 0.41 = John Rogers - Ariel Appreciation Fund Add 10.28% 26,347 0.22 = Francois Rochon - Giverny Capital Add 3.90% 44,923 0.27 = Chuck Akre - Akre Capital Management Add 0.11% 8,240 0.01 = Steven Romick - FPA Crescent Fund Buy 927,390 1.48 Hold price at EOQ: $90.48 [https://www.dataroma.com/m/activity.php?sym=KMX&typ=a](https://www.dataroma.com/m/activity.php?sym=KMX&typ=a)
I bought a lot in low three digits and am now sitting pat, clearly no richer.
So, either it’s a much better deal now, or I’m a fool.
Or both, of course.
I like the company a lot…the business results are a lot steadier than the stock price.
It seems to go in and out of fashion, causing pretty substantial oscillations in valuation levels.
As for the valuation level here, they seem attractive to me. Probably.
The quirk is that the current earnings rate is a fair bit below what the historical trend would suggest (very round numbers $6.50 and $8.30 respectively)
If that dip is a passing blip, it’s a great deal at today’s price, 45% cheaper than the usual multiple of on-trend earnings.
But only an optimist would extrapolate that confidently.
If this is the end of the good times and only recent earnings levels are the norm, it still seems to be a pleasant deal.
A wild earnings guess for the next year might suggest roughly 8% earnings yield on today’s price, give or take?
Or worse, of course. The future hasn’t happened yet.
The old EPS growth trend, by the way, was a rate of increase of inflation + 13.8%/year.
The average multiple of the on-trend real earnings has been about 18.8 in the last decade or more.
Comparing the two, you can see that the multiples haven’t been exuberant given the growth–it has been a pretty good deal much of the time.
Applying the Peter Lynch principle that the consumer is the best analyst, I walked past the Carmax lot in Albuquerque yesterday, and it was buzzing with activity. How do they look in your neighborhood?
Carmax is busy down here. Nextdoor neighbor came home with a fresh car with Carmax plates yesterday. I do wonder about the auto finance part of their business. Auto finance is problematic with longer durations and recent unusually good collateral value retention. I assume KMX does not retain any of the weaker credit stuff but auto finance in general is not somewhere I want to hang out.
They are great to do business with. A friend traded his sons older car and was thrilled with the price paid and experience. And we traded an older Lexus at a pretty good price. They were able to do it all and give us a check in about 90 minutes. We’re also about to get a trade in price on my daughters Mazda.
I assume KMX does not retain any of the weaker credit stuff but auto finance in general is not somewhere I want to hang out.
I think there is a niche area here. Which Carmax probably does not touch.
There is the “buy here, pay here” market segment. Lots of these down here. They collect a decent down payment, and repo the car when/if the buyer misses a weekly/monthly payment. The car goes back on the lot and they do it again.
When we were building our house I chatted with one of the workers who ran a small BY-PH lot. He said that he sometimes sold the same car 4 or 5 times in a year.
So I guess it could possibly be lucrative.
Markel folks were also very complementary of KMX when the topic was brought up in Omaha . . .
Just to offer a little counterpoint to the apparently cheery consensus around KMX, I would point out that Markel holds ~125 stocks in its equity portfolio and Carmax was not among them as of the most recent MKL 13F filing (Aug. 5):
Tom Gayner was among the early Carmax evangelists, touting its no-haggle model back in the days when customers were still subject to the aggravation of used-car salesmen (and their managers). It was a top-five position at Markel for a long while and he did very well with it. Carmax was the disruptor then. Now it’s the potential disruptee by online-only models that have dispensed with showrooms and storefronts altogether.
Gayner ditched his position in the early days of the pandemic when he thought it was important to raise cash. He has since said he overdid it, but he’s had plenty of opportunity to re-establish a position in KMX at relatively attractive prices, especially this year, and he hasn’t (at least as of Aug. 5). He nibbled on a bunch of fallen flyers in Q2, including Netflix and Shopify, but not Carmax.
During their hypergrowth phase their moat was the ease and simplicity of transactions compared to an existing model that many people loathed. Now anybody will send you an instant fixed price, even traditional dealerships, so the moat now seems about ubiquity and brand, which may well be enough to keep them thriving, I don’t know.
My family anecdote is no more statistically significant than anyone else’s, but my son, a digitally facile millennial, buys and sells all his vehicles through Carvana. He is happy to do every aspect of these transactions online and never set foot on a car lot. Carvana is not profitable, of course, but its TTM revenues are now about 40% of Carmax’s, so it seems plausible it could get there if/when its digital land-grab phase is over.
In its mature phase, KMX has been a reliable pendulum play. You could buy it toward the low end of its 52-week range and sell it toward the high end, rinse and repeat. If that’s still true, buying at these recent sub-100 levels seems likely to work out well, although it might take longer than usual as recessions are rarely kind to public market valuations of big-ticket retailers.
I would just suggest there’s more risk here than there was. That an avowed fan like Gayner hasn’t seen fit to get back in seems notable to me. A number of great businesses are selling for rather promising prices at present, which makes it easier, at least for me, to steer clear of historically leading businesses like Carmax and Netflix that are dealing with changing landscapes. Disruption of successful models, especially for consumer-facing businesses, seems to happen more rapidly than ever these days.
“They are great to do business with. A friend traded his sons older car and was thrilled with the price paid and experience. And we traded an older Lexus at a pretty good price. They were able to do it all and give us a check in about 90 minutes. We’re also about to get a trade in price on my daughters Mazda.”
Agree. If you’re selling a car Carmax is a great resource. They’ll give you a no obligation offer good for 7 days. Now you know what to price it at on Craigs and the like (10-20% more).
I’ve gotten prices from them on a few cars over the years. Sold two to them. The last one went to Carvana, though, who offered a few k more and came to the house to pick it up. What a deal!
I don’t think I’d ever buy from Carmax, though. Prices are sky-high and at least for the few cars I perused (while waiting for them to price my car) the quality wasn’t top notch. The savings over new were minuscule.
Thoughts on Carmax now?
“CarMax Stock Tumbles After Q2 Earnings Miss As Car Sales Slide
CEO Bill Nash called the August quarter a “challenge” for the broader used car industry as CarMax fell shy of analysts forecasts for both profits and revenues.”
Thoughts on Carmax now?
I think we’re in a nasty bear market and I should have sold yesterday afternoon.
Seriously, this is probably a time to just sit on cash and let the Fed do what its going to do and get back in when we see indications of a Fed pivot.
If you are holding, the question is do you sell now and buy back in a month, or do you buy now and sell your tax loss in a month?
Anecdotally, seems to me they, Carmax, Carvana, etc., have been paying high prices and pricing very high in turn, more than new car MSRPs in some cases. That could not last. Suspect they all have inventory that has to be marked down.
It’ll wash out pretty quickly. Then Carmax will be back to high profitability.
So, is this a real crisis, or a very temporary one? Might be an opportunity.
Fascinating thread here:
Carmax is trading at 13 times ttm eps of $4.96, including the current miss. They have averaged $5.50/sh in earnings over the past five years, so using that as a normalized earnings KMX is trading at 12 times. I estimate that $0.34 of that miss is attributable to loan loss reserves and loan write offs of $54 million, so we can see it as one time (although I expect more to come in the next few quarters). At 12 times normalized eps KMX is trading at the low end of its historical PE range. It has traded under 10 a few times, most recently in 2020, so we could see the shares sink to the $50 range or below, especially if earnings continue to deteriorate.
Some of the pressures on the business include the loan loss provisioning of $40 million, as well as a one time write off of $14 mil in “uncollectible receivables”. From their 10K they note that:
“all loans in our portfolio of managed receivables were fixed-rate installment contracts. Financing for these receivables was achieved primarily through non-recourse funding vehicles that, in turn, issued both fixed- and variable-rate notes … Interest rate risk related to variable-rate debt is primarily mitigated by entering into derivative instruments. Our derivative instruments are used to manage differences in the amount of our known or expected cash receipts and our known or expected cash payments principally related to the funding of our auto loans receivable. Disruptions in the credit markets or unexpected changes in prepayment activity could impact the effectiveness of our hedging strategies. Generally, changes in interest rates associated with underlying swaps will not have a material impact on earnings; however, they could have a material impact on cash and cash flows. Absent any additional actions by the company to further mitigate risk, a 100-basis point increase in market interest rates associated with non-recourse funding vehicles would have decreased our fiscal 2022 net earnings per share by approximately $0.14.”
There has been a 225-basis point increase in the Fed rate since they wrote this in February, with another 150-200 point increase coming in the next six months, so there you have the cause of earnings declines. It will take time for them to work off this fixed rate fiasco on their financing, but this is a secular and not a structural problem.
Along with the problems in the loan financing business, increased costs due to “increases in staffing and wage pressures over the past year,” as well as increased investments in technology and growth initiatives, have also contributed to margin erosion. Earnings were ground up between these twin millstones of rising financing costs and rising operational costs.
On the bright side, revenues actually increased and net interest margin on their loan portfolio actually improved despite the increase in loan loss provisioning. While unit sales decreased, revenue per sale increased resulting in a small improvement in overall revenues. Revenues have actually increased by 11% in the first six months, so any success in controlling costs and halting the declines on the financial side of the house will be immediately felt in improvements to the bottom line.
Carmax has clearly hit a bump in the road, and earnings will continue to take hits until the problem of fixed rate loans financed through variable rate credit start to come off the books. If the average length of a Carmax car loan is four years then we could see them working off this problem for several years. One mitigating factor is that a Carmax loan is generally a bad deal for consumers as it carries a high fixed interest rate.
Bottom line, I think Carmax will work through this difficult period and, if you have patience, an entry at 12 times earnings might look quite attractive down the road. In the meantime, I suspect this could fall further as they work through their Carmax Auto Financing problems. The next 12-24 months, however, could be quite bumpy.
I only wish this had occurred to me sooner. It’s all so obvious after the fact. Oh, well. It’s a small position.
This looks like Kitchen sink quarter, you will get the confirmation next quarter. At that point one can look at whether to establish a long-term position.