KMX - CarMax

[Scudbucket]

Hi all,

 

Has anyone done any work on CarMax?  Its business model seems to be gaining traction with customers, and their runway seems fairly long.

 

Thanks,

 

Scud

[fareastwarriors]

CarMax - Bad News priced into KMX?

By Oppenheimer 1/12/16

KMX_-_oppen.pdf

[TTCV]

essentially a spread business (retail side - buy used cars from companies like KAR and then sell them to retail consumers). have to have faith that consumers are price insensitive enough / the KMX brand is strong enough to maintain a sufficient spread and that there will be enough volume / demand to offset their highly operating leverage driven retail store roll-out business model.

 

their financing business is essentially a captive specialty finance company focusing on securitized auto loans. seems like a much more moatless business vs. their retail side, where KMX seems to actually have a decent amount of goodwill associated with the brand due to their national network and reputation for honesty / non-lemon used cars in contrast to the status quo perception of slimely used car sales men.

[muscleman]

https://www.forbes.com/global/1999/0517/0210039a.html

 

I find this to be fascinating. Does anyone know how they turned around in 1999?

 

BTW, the highly touted Circuit City in this Forbes article is long gone in 2009.

 

 

[Lance]

Hi all,

 

Has anyone done any work on CarMax?  Its business model seems to be gaining traction with customers, and their runway seems fairly long.

 

Thanks,

 

Scud

 

Hi Scud - I have not looked at this, but saw something recently on Steve Eisman recommending this as a short - ie subprime auto lending bubble.  Will see if I can find it.

 

Thanks

Lance

[Scuttlebutt Plunger]

Looked at HTZ.  Couldn't get comfortable with the balance sheet.  I think KMX is better positioned, but resale values super low.  Lot more hair on these companies that meets the eye

[Liberty]

This is what good online marketing looks like:

 

Some couple selling their 1996 Honda Accord made a commercial on Youtube that got viral:

 

 

CarMax responded with this:

 

 

It cost them around $20k for a ton of good publicity and makes their brand looks pretty cool...

[Jurgis]

Classy.  8)

[walkie518]

I think this looks pretty cheap here in spite of the rest of what's out there

 

I get the feeling that many are nervous about the financing arm, but it's my understanding that they are pretty picky about those loans

 

to me, it reminds me when DE was trading around $70/sh...anyone love or hate this one?

[LongTermView]

I think this looks pretty cheap here in spite of the rest of what's out there

 

I get the feeling that many are nervous about the financing arm, but it's my understanding that they are pretty picky about those loans

I own it and agree it looks cheap.

 

Regarding financing:

1. The loans are non-recourse.

2. Their loans made it through the 2008-2009 financial crisis.

[Castanza]

I think this looks pretty cheap here in spite of the rest of what's out there

 

I get the feeling that many are nervous about the financing arm, but it's my understanding that they are pretty picky about those loans

 

to me, it reminds me when DE was trading around $70/sh...anyone love or hate this one?

 

Personally, I'm not a fan of anything auto related right now. Default rates are through the roof. Used car prices seem artificially high (See used pickup trucks). Auto manufacturers are seeing a surplus of new vehicles sitting on their lots. What happens to CarMax when the price of used vehicles gets cut in half? This whole sub-prime auto loan things makes me uneasy and gives me enough pause to stay away.

 

To be fair, I haven't dug into this at length. There probably is some value play to be made. But for me it's enough to stay away.

 

 

[rogermunibond]

As the defaults play out, the used car market will be in surplus and the spread very nice for scale players like KMX.  Have to time this one I think.

[vince]

I think this looks pretty cheap here in spite of the rest of what's out there

 

I get the feeling that many are nervous about the financing arm, but it's my understanding that they are pretty picky about those loans

 

to me, it reminds me when DE was trading around $70/sh...anyone love or hate this one?

 

Personally, I'm not a fan of anything auto related right now. Default rates are through the roof. Used car prices seem artificially high (See used pickup trucks). Auto manufacturers are seeing a surplus of new vehicles sitting on their lots. What happens to CarMax when the price of used vehicles gets cut in half? This whole sub-prime auto loan things makes me uneasy and gives me enough pause to stay away.

 

To be fair, I haven't dug into this at length. There probably is some value play to be made. But for me it's enough to stay away.

 

Carmax's has the best lending operation you will find anywhere and their default rates are low and stable.  The price of used vehicle's do not get cut in half because as they fall and the gap widens between new and used, demand for used rises.  Prices for used are stubbornly high but the same forces will fix that, they always do.  There will always be one problem or another in every industry and the used car business will ebb and flow but it will be around for a very very long time.  And KMX has some serious advantages,  mgmt created those advantages and consistently run the business to widen the moat.  They will be hard to catch and right now they are being valued as if their advantages don't exist.  Thats the margin of safety.....even if their competitive position deteriorates your losses here should be limited because your not paying a valuation premium.  Can you imagine if a part of this business was offered to you, in a private transaction at today's current free cash flow yield of 8 percent?  I know quite a few local, very rich businessmen that don't understand stocks.  They do cartwheels when they find unlevered high single digit rates of return in commercial real estate that will not grow incrementally at those rates of return.  Or said another way, these investments outside their core businesses have no advantages whatsoever.  In contrast, Kmx has a long runway of unit growth (and some margin growth as well when their growth slows) and that growth comes with a very nice coupon.  The more cash they invest for growth and the longer you hold will make your returns on the stock equal to their 15-20 percent ROE's.  The problem is that people let headlines, short term thinking and market price volatility influence their process.... the business men I referenced would not buy public Kmx stock but they would most certainly buy private Carmax even though it's the same investment.  Lastly, I cant imagine we are going to have, anytime soon, a more severe financial crisis than 09 and they survived.  If it ever gets worse than that then you will have to worry about almost every business. 

 

 

[BRK7]

Stock is down 55% year-to-date, more than double the drop in the S&P 500.  Anyone have thoughts on KMX?

 

 

[KJP]

Stock is down 55% year-to-date, more than double the drop in the S&P 500.  Anyone have thoughts on KMX?

 

I have been watching it, but have not bought yet.  They depend on the availability of consumer credit, so things could get very bad. 

 

But thinking about the potential gains in long CarMax brought up a related question:  Can Carvana survive this?  It's down even more than CarMax and rightly so.  Compare balance sheets and business models. 

[BRK7]

Stock is down 55% year-to-date, more than double the drop in the S&P 500.  Anyone have thoughts on KMX?

 

I have been watching it, but have not bought yet.  They depend on the availability of consumer credit, so things could get very bad. 

 

But thinking about the potential gains in long CarMax brought up a related question:  Can Carvana survive this?  It's down even more than CarMax and rightly so.  Compare balance sheets and business models.

 

Agreed that Carvana is in a tight spot.  KMX has EBITDA/Interest Expense of 21x over the past 12 months or so.  Carvana, on the other hand, has never had a quarter with positive EBITDA -- as far as I can recall.

[KJP]

Stock is down 55% year-to-date, more than double the drop in the S&P 500.  Anyone have thoughts on KMX?

 

I have been watching it, but have not bought yet.  They depend on the availability of consumer credit, so things could get very bad. 

 

But thinking about the potential gains in long CarMax brought up a related question:  Can Carvana survive this?  It's down even more than CarMax and rightly so.  Compare balance sheets and business models.

 

Agreed that Carvana is in a tight spot.  KMX has EBITDA/Interest Expense of 21x over the past 12 months or so.  Carvana, on the other hand, has never had a quarter with positive EBITDA -- as far as I can recall.

 

Looks like we're far from the only ones to cast a skeptical eye on Carvana ....

[coc]

Carvana was already bankrupt but this may get people to realize it.

[gfp]

Carmax was a great trade today - thanks for bringing it to my attention.  The volatility is incredible lately

[KJP]

Carvana was already bankrupt but this may get people to realize it.

 

Yes, perhaps the traditional definitions of "liabilities greater than assets" and "can't pay your bills as they come due" will come back in fashion, rather than 2023 EBITDA.

 

Ultimately, though, the idea behind Carvana -- delivery to your home at scale (whatever that is), rather than sales lots all over the place -- might be right, but it's just too expensive to do it from scratch unless you have a very long run of loose credit. 

 

What other companies have similar business/financing models, i.e., currently barely profitable (or perhaps unprofitable) on a unit basis but "investing" on the theory that they will become profitable at scale?  Anyone following that approach is staring at bankruptcy.

[coc]

Carvana was already bankrupt but this may get people to realize it.

 

Yes, perhaps the traditional definitions of "liabilities greater than assets" and "can't pay your bills as they come due" will come back in fashion, rather than 2023 EBITDA.

 

Ultimately, though, the idea behind Carvana -- delivery to your home at scale (whatever that is), rather than sales lots all over the place -- might be right, but it's just too expensive to do it from scratch unless you have a very long run of loose credit. 

 

What other companies have similar business/financing models, i.e., currently barely profitable (or perhaps unprofitable) on a unit basis but "investing" on the theory that they will become profitable at scale?  Anyone following that approach is staring at bankruptcy.

 

I agree, which has always been the risk these new-era companies have been running. "When we make it to scale, we'll be so profitable!"

 

Yeah, IF you make it. No margin for error. It was WeWork's excuse too. But Carvana is/was a bad actor in many ways. The Garcias have a bad history -- they own a company called  Drivetime and the father of CVNA's CEO went to jail for fraud during the S&L scandal. Carvana is a poster child for this capital-driven excess. Ever seen one of their "vending machines"? Insane. Parts of their accounting are questionable too. And that's leaving aside the unprofitable model, building debt, constantly selling stock etc.

[Read the Footnotes]

Carvana was already bankrupt but this may get people to realize it.

 

Yes, perhaps the traditional definitions of "liabilities greater than assets" and "can't pay your bills as they come due" will come back in fashion, rather than 2023 EBITDA.

 

Ultimately, though, the idea behind Carvana -- delivery to your home at scale (whatever that is), rather than sales lots all over the place -- might be right, but it's just too expensive to do it from scratch unless you have a very long run of loose credit. 

 

What other companies have similar business/financing models, i.e., currently barely profitable (or perhaps unprofitable) on a unit basis but "investing" on the theory that they will become profitable at scale?  Anyone following that approach is staring at bankruptcy.

 

I agree, which has always been the risk these new-era companies have been running. "When we make it to scale, we'll be so profitable!"

 

Yeah, IF you make it. No margin for error. It was WeWork's excuse too. But Carvana is/was a bad actor in many ways. The Garcias have a bad history -- they own a company called  Drivetime and the father of CVNA's CEO went to jail for fraud during the S&L scandal. Carvana is a poster child for this capital-driven excess. Ever seen one of their "vending machines"? Insane. Parts of their accounting are questionable too. And that's leaving aside the unprofitable model, building debt, constantly selling stock etc.

 

At least one good thing has come out of this mess.

Carvana was my top pick to short or buy puts on, but too many other people knew, and it seemed a little bit expensive to me. I am frequently too cheap for my own good. Expressing my negative sentiment on Carvana 6 weeks ago would have worked out quite well.

[coc]

Carvana was already bankrupt but this may get people to realize it.

 

Yes, perhaps the traditional definitions of "liabilities greater than assets" and "can't pay your bills as they come due" will come back in fashion, rather than 2023 EBITDA.

 

Ultimately, though, the idea behind Carvana -- delivery to your home at scale (whatever that is), rather than sales lots all over the place -- might be right, but it's just too expensive to do it from scratch unless you have a very long run of loose credit. 

 

What other companies have similar business/financing models, i.e., currently barely profitable (or perhaps unprofitable) on a unit basis but "investing" on the theory that they will become profitable at scale?  Anyone following that approach is staring at bankruptcy.

 

I agree, which has always been the risk these new-era companies have been running. "When we make it to scale, we'll be so profitable!"

 

Yeah, IF you make it. No margin for error. It was WeWork's excuse too. But Carvana is/was a bad actor in many ways. The Garcias have a bad history -- they own a company called  Drivetime and the father of CVNA's CEO went to jail for fraud during the S&L scandal. Carvana is a poster child for this capital-driven excess. Ever seen one of their "vending machines"? Insane. Parts of their accounting are questionable too. And that's leaving aside the unprofitable model, building debt, constantly selling stock etc.

 

At least one good thing has come out of this mess.

Carvana was my top pick to short or buy puts on, but too many other people knew, and it seemed a little bit expensive to me. I am frequently too cheap for my own good. Expressing my negative sentiment on Carvana 6 weeks ago would have worked out quite well.

 

You and me both.

[KJP]

How quickly things change.  Carvana up almost 200% from its low a few days ago.  Somebody should send Ally a big thank you.

[BRK7]

How quickly things change.  Carvana up almost 200% from its low a few days ago.  Somebody should send Ally a big thank you.

 

Yep, CVNA closed today at $87.81, up 199% from it's low on March 20, just before the below:

 

• March 24:    Ally increases its loan purchase program to $2B (Oddly, the press release says the program was doubled in size, while the 8-K says the agreement was up-sized by $1.6B.  I'm not sure what to make of the discrepancy).
   
  
• April 2:      Carvana raises $600 million in equity, including a combined $50 million from the founder/CEO and his father, the controlling shareholder.
  

 

Ally itself is trading like it is distressed, down about 53% YTD, and soon needs to pay $1.35B to fund an acquisition it announced on Feb 18 (planned to close in 3Q). 

 

The CVNA equity raise was at $45/share, massively dilutive compared to CVNA's Feb 21 close of $110/share.

 

Somehow, this company continues to defy gravity.  CVNA is down about 4% YTD, compared to a 13% YTD decline in the S&P500.