No. of Recommendations: 3
March (after Q3 report):
I bought about a 2% position in November/December, and increased it substantially when the stock swooned in late December, to the low $50s.
That was after the publication of their Q3 report, which didn't seem so bad to me. The stock quickly rebounded to the mid- to high $60s where it is now, and Q4 results (for the period ending at the end of February) should be out in about a month - last year, they were out on April 12.
The big question is going to be whether their unit sales have recovered from the second half of last year, when there were pretty serious shortages of new and used cars on the markets. Last quarter, they sold 298,807 cars, 180,050 of them retail (down 20.8% year over year) and 118,757 of them wholesale (down 36.7%). Very roughly, they make $2000 per retail sale, and $1000 per car per wholesale sale, but both of those numbers have been under pressure as well.
I think it's good to keep in mind the large picture, which is that they are under no threat of insolvency (something that some of their competitors, like Carvana, would like to be able to say), and are very likely to keep slowly taking market share (currently about 4%) in a used car business where they are already #1 but with a long runway for increasing their share. They were making about $5 per share in the year prior to COVID, had a brief spike to $7 eps before problems with the new and used car markets and interest rate increases added some turbulence, but I think it is quite likely that they will be back to that $5-7 range as soon as markets settle down, so their current sub-$70 price is more than reasonable. If 2022 Q4 shows bad results, we may get another drop in the share prices, but that would represent an opportunity,...
April (after Q4 report):
So it turns out that in Q4, their results were... pretty good. They made only 44c per share, compared to 99c a year ago, but the market likes the result because 'expectations' were apparently only 20c, so all is forgiven. No, seriously, who knows what the market will think and do, but from a value perspective, they have shown that they can easily trim their sails and return to profitability, at the expense of growing sales, and they are doing that. They sold 15.5% less cars than the year ago quarter, with average vehicle sales price was down about 9%, but they made $2,277 per retail sale, up a bit from a year ago, with wholesale gross profit at $1187, flat from a year ago, demonstrating that what is important is not the sale price, it is how much Carmax can take out of each transaction. And they cut SG&A costs by $573m. The finance side took a $98m allowance for loan losses, compared to $54m last year, which is bad, but small, and not as bad as one might have worried about, given high interest rates, and a collapse in used car prices, so that defaults recoveries are not as good as they might have been.
All in all, I'm happy enough with the results to keep my 4% stake, as I think a full recovery to prior levels of profitability, in the next 12-18 months, still seems perfectly plausible.
Now, June (after Q1 report):
Unit sales for retail and wholesale down 9.6% and 13.6% year over year, respectively. Gross profit per retail and wholesale unit $2361 and $1042, so holding up nicely. No losses on the finance side, and SG&A costs down 5.7% (excluding one-time gains from a legal settlement). EPS bounced back nicely to $1.44, .28 of that was from the legal settlement. Still, well on track to get back to the full year $5 pre-COVID EPS range. Shares are understandably up on the news, to over $85 as I write this, a 70% gain from the year's low. Given all the uncertainties in the market, I have sold about half my stake (before today's good news) but the price still seems reasonable. Too bad they didn't such up some shares when they had a chance.
