CarMax: Running On Fumes
CarMax (KMX) is set to release earnings on June 18th, and it likely will not be pretty. There is a deep decline in new car, truck and SUV-type sales, with an extreme mix shift from SUVs and trucks to more fuel efficient cars which are new - not used.
Consumers trading down from new to late model used cars usually provide a sales cushion for the likes of CarMax and other secondary market dealers, but rapid price declines of over 15% year to year in widely owned gas guzzlers, coupled with much tougher credit, limited home equity and a weaker economy have made the consumer upside down on loans and unable or unwilling to trade into another vehicle. CarMax has had to write down inventory in a significant fashion.
Plus, new car dealers are offering almost giveaway incentives which slows traffic at the CarMax lots. Why buy old when you can buy new, if a gas guzzler is what you want?
Recent statistics have shown the widest divergence ever between retail and wholesale trends covering two years. And consumers appear to be less willing to sell their vehicles to CarMax when they learn that they will get a lot less money than expected due to market price declines.
Financially, CarMax recently completed a private placement to create liquidity. Accounting rules FAS 149 and FIN 46, as proposed now, would eliminate CarMax's ability to use gain on sale accounting practices, which would significantly impact the timing of income recognition.
Between gas prices, home equity scarcity,sharply lower auto purchasing and a glut of unwanted gas hogs on the lots, CarMax (and the industry as a whole) is suffering with no end in sight.
Trading at $18.23/share, KMX stock is close to its 52-week price range of $16.81-$27.42. With a $4b market cap, KMX is considered to be the premiere previously owned vehicle dealer in the U.S.
I believe the downward trend for KMX will remain in place, and I would not buy the stock even at this low price. In fact, I would short it anticipating a fall to slightly under $12.00/share.
Disclosure: The author holds no position in KMX.
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This article has 4 comments:
- BigNate74
- 1 Comment
Jun 17 10:06 AM- car guy
- 4 Comments
Jun 17 10:46 AMFirst, there is still plenty of reason to buy used vehicles. For example, new civics are such hot sellers that dealers are now charging $1000 over sticker - plenty of reason to go for a used civic.
Second, the author seems to be talking out of both sides of his mouth here. He initially points to "rapid price declines of over 15% year to year in widely owned gas guzzlers"
Next, he points out that "new car dealers are offering almost giveaway incentives which slows traffic at the CarMax lots. Why buy old when you can buy new, if a gas guzzler is what you want?" Didn't you just say that prices of used gas guzzlers are down 15%?????
Lastly, he provides no justification at all for his $12 price target.
Please don't post any articles unless you have something meaningful to say.
- SkipinCA
- 21 Comments
Jun 17 04:55 PMI agree that there will be a decline in the number of cars purchased while we get through a protracted consumer recession. This will effect sales of both new and used cars. But let's look at the difference between the costs of buying used vs new. Since you mentioned gas guzzlers, I used a Chevy Suburban for example. A rought check that the Chevy website says a low end 2008 model goes for $39,000. It gets 14 city and 20 Hwy MPG. Take the average of 17MPG. If you go to the Carmax website, you can purchase a 2005 Suburban with 30K miles for $21,000. That is a savings of $18,000 or 46%!!! Very significant. But Chey will give you 60 month financing at 0% compared to maybe 8% on a used car. The monthly payment on the new car is $650 but the used car is only $426, 35% less!!! Again, big savings. Now, let's assume the 2005 gets worse milage, say 12MPG vs 17MPG. If one drives 15,000 miles per year you would use about 367 gallons less with a new car. At $4.50 per gallon you would spend about $1654 per year or $138 per month more on gas with a used car. That brings the total monthly cost of a used car up to $564, which is only $86 less than a new car. I was suprised at how much a difference 5MPG makes in monthly cost.
That said, I think that the significant up front cost savings of a used car will be compelling to a lot of people. I would not write off the used car industry or CarMax. At est EPS of .84 for this year and a price of $18.50 that roughly implies a 10% growth rate over the next 5 years, which trails off over the next 10 years to 3%. Given the company has the ability to open many new stores over that period, it is certainly not unreasonable to hit this once the economy recovers. A $12 price would imply a flat 3% growth rate in perpetuity. I think they can do better than that. Therefore, I would certainly not short the stock. But, I sure don't see any obvious catalysts that would make the stock take off. Better to let the bears have their day and pick it up later at a better price. I think this is a great concept and they have real size advantages that will win the day in the long run.
Lastly, how they account for securitization gains is irrelavent to cash flow and not worth considering. The real issue is whether they can do securitizations at all. They appear to have done one recently all be it a decreased profitability.
- Tavares
- 36 Comments
Jun 18 05:47 AM