Subject: Re: OT: Car Max (KMX)
But this too shall pass, since I don't see any reason to think their business has been permanently impaired. ...

So I think they are a good value here, for anyone who can be patient and wait for the dust to settle and for normal markets conditions to return. I don't think they need to worry too much about interest rates or unemployment or recessions - people need to have a car, and KMX has a good way of finding one for them, with a pretty much fixed $2000 cut that they take.

This all sounds pretty sensible to me.

If you use revenue as a quick proxy for how profits might stabilize when the couple of years of oddities subside,
Trailing four quarter revenue is up 52% from the four quarter stretch three years earlier, 15.1%/year compound growth rate.

Meanwhile the stock price has fallen at a rate of 7%/year in the same stretch.
P/S has therefore fallen from .72 then to .37 now
Average since 2010 by eyeball was in the vicinity of .75-.80

Revenue isn't a great value metric, but it's a better metric than current earnings when there are weird short term things happening on the expense side.
You just have to assess how likely it is that the disruptions to net margins are transient.

The biggest near term risk I see is the possibility some financial crisis closing the debt markets to them for a while.
(a fair bit of their business is borrow-to-lend, securitize and repay, repeat. The borrowing and securitization steps can occasionally be fraught)
They will survive that, but it could crimp their volume for as long as it lasts.
As a spot check, rolling year profits fell but never went negative during the credit crunch, then returned fully to their prior trend.

A recession as such is not such a big worry. As you note, Americans need cars.
If times are tough and they can't spring for a new one, they get a used one.


In case anybody cares, KMX is tied as my second biggest position.
Though it's a very big gap down from my biggest : )
I like "flow" businesses. To a first approximation, they don't care whether cars are cheap or expensive, just how many they turn over.
I suspect that this is the reason that Mr Buffett likes real estate agencies. (and car dealerships, for that matter)
There will always be volume, Berkshire's units will always get some share of that, so there will always be profits.
In fact I'm a little surprised that BH Automotive hasn't really expanded. 100 dealerships acquired in 2015, 102 now.

Jim