No. of Recommendations: 12
KMX P/S ratio is now as low as in 2020 and almost as low as during the abyss of 2008. In 2021 P/S ratio was around ~1.1x and it was clearly overvalued compared to it's
history, now it sells for ~0.4x. If it's undervalued depends on whether you think they can get back to their historical margins. I'm betting they can.
The Value Line forecast does seem to be extremely pessimistic about their net profit margin outlook.
Net profit margin at Carmax averaged 4.07% 2013-2020.
The lowest full year 2013-2019 was 3.90%.
Value Line forecast for 3-5 years out is 1.9%.
Perhaps they are concluding that the era of low interest rates is over, and Carmax will be unable to attain their previous interest margin again?
If the dip in margins is a cyclical problem rather than a permanent one, it makes a big difference.
i.e., if the sales grow at the rate they forecast but margins rise back to the old 4%, their net profits forecast for that date range would be $9.26 instead of $4.40.
And that's assuming that their forecast of sales growth rate per share is accurate.
That too is very conservative. They forecast sales growth of 6.5%/year. For want of better numbers, let's call that inflation 4% plus real growth 2.5%/year, perhaps.
That's a fair bit of conservatism when compared with the last 5-10 years with inflation of ~2% and real sales growth per share around 9-11%/year.
Margins may go up and down, and we might not know where the future average is, but it's a sure bet that over long periods it will oscillate around some central number and that watching sales will eventually give you an idea of where profits are going.
My base case scenario does not match those of Value Line, which forecasts sales rising at 6.5%/year for 3-5 years with profits falling at -3.5%/year.
Even if every current sling and arrow turns out to have been transient, certainly the cycle has not been friendly to them lately.
Interest rates are a lot higher than they were, so volume is understandably taking a hit at least for a while until a new equilibrium is reached between "what it costs to borrow for a car" and "I can't live without a car any longer".
The chaos of supply over the last couple of years made everything anomalous.
And there are signs of recessionish consumer behaviour, slowing spending on a number of things.
These things are certainly not good news, but they tend not to last forever.
One part that's a lasting downer is that they are battening the hatches a bit, and have halted buybacks just while the share price got attractive. A shame.
I aim to peer past the cycle.
At some point we will have a couple of years that represent some kind of normal in terms of supply chain and profit margins.
I expect owner earnings per share will be a whole lot higher on that date than they are today.
Jim
