Author Topic: KMX - CarMax  (Read 6417 times)

Castanza

  • Jr. Member
  • **
  • Posts: 85
Re: KMX - CarMax
« Reply #10 on: February 13, 2019, 06:35:27 AM »
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

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 747
Re: KMX - CarMax
« Reply #11 on: February 13, 2019, 07:09:39 AM »
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

  • Sr. Member
  • ****
  • Posts: 376
Re: KMX - CarMax
« Reply #12 on: February 13, 2019, 09:52:57 AM »
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.