Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
No. of Recommendations: 2
https://apple.news/AkUZwqAhaSoGqtx0W5ATYUg70,000 new cars are stuck at factories as consumers face delays: Here's what's going on
'In a May 25 speech to the North American Rail Shippers Association (NARS), Oberman said in "recent months underinvestment in equipment and labor by BNSF (railroad) has resulted in a severe shortage of the railroads' ability to move rail cars to major auto manufacturers ' autoracks in particular ' to take finished vehicles to market."
He said in May that at least 70,000 new vehicles were parked near plants awaiting rail cars to get to dealerships. He said because automakers struggle to move vehicles, "auto manufacturers have already reduced production schedules by at least 50,000 vehicles."
Seems a bit unfair to single out BNSF.
There certainly is a shortage of inventory at car dealers. Not even cars to test drive. Was told by one dealer to order one and test drive when it eventually shows up. Quite frustrating.
We've resorted to abusing the hospitality of CarMax by test driving nearly new vehicles there. No intention of paying CarMax's ridiculous prices, which in many cases are more than new MSRP. I'd rather wait for a new one. Understand some folks can't wait, otherwise how else would CarMax be selling these vehicles?
No. of Recommendations: 17
No intention of paying CarMax's ridiculous prices, which in many cases are more than new MSRP. I'd rather wait for a new one. Understand some folks can't wait, otherwise how else would CarMax be selling these vehicles?
As an aside, speaking as a big (for me) Carmax shareholder, this comment leaves me with a happy glow.
As a rule of thumb, you want to be invested in the firms getting away with nosebleed pricing : )
On a more serious note, one might speculate that the topsy-turvy car pricing situation seen lately in the US...Used car backwardation?...
is a sign that new car prices are a likely to rise a lot soon.
The resellers like Carmax rely on flow...they like to make a couple of thousand per car, and don't really car all that much what the actual car price is.
They react to the prices they are paying for the level of inventory they need, and consequently their pricing tracks supply and demand more or less in real time.
The car companies, on the other hand, have huge stickiness and complex strategic calculations in their pricing.
Production forecasts, recession forecasts, inventory levels, and competitive pressures.
They also have the financial muscle to take losses for a while, if they deem it strategically useful in light of the above.
They can afford to diverge from reality for a while, but have to adapt to it eventually.
If those views are to some extent valid, the new/used car price gap could be seen as an advanced indicator of where car prices are likely to go.
Since, as you note, it really makes no sense for a used car to cost more than an identical new one.
If it doesn't make economic sense, it probably won't last.
Jim
No. of Recommendations: 0
'Since, as you note, it really makes no sense for a used car to cost more than an identical new one.
If it doesn't make economic sense, it probably won't last.'
Indeed. Could go the other way, no? When the new car shipping issues do get straightened out and manufacturers return to full production. Used car prices could drop (become more sensible).
Does that hurt the largest used car retailer who has overpaid for inventory? I don't know if it hurts them seriously. Maybe their turnover is so great it would wash out very quickly?
No. of Recommendations: 10
Having been in the industry, I can tell you that rapidly falling prices will hurt all owners of used car inventory,some worse than others. It is a function of how quickly that inventory can be turned over. The fastest turnover I ever experienced was at an under $3000 lot. We turned inventory three times per month, and we're not deeply affected by wholesale price changes because of that. At the average new car store the average turnover is more on the order of 60 days, and they are more affected. At ninety days most used inventory was wholesaled or sold near cost retail. Many sins can be hidden in old inventory if the owners are not vigilant.
Jk
P.S. These observations are 6 years dated, but the principle remains.
No. of Recommendations: 13
Does that hurt the largest used car retailer who has overpaid for inventory? I don't know if it hurts them seriously. Maybe their turnover is so great it would wash out very quickly?
As others mentioned, it does hurt, but only for as long as it takes to replace the inventory.
Used car prices go up and down around a long term trend which resembles inflation.
Used car dealers get a one-time boost from inventory when they rise, and a one-time drag when they fall, but it's kind of a wash over time.
For longer term returns from Carmax, it's more useful simply to concentrate on the volume, at least for the pure retailing side of the business.
To a first approximation, they make a constant gross margin per vehicle. (one number for retail, a lower one for wholesale)
Plus of course the financing side, which is driven by the share of sales financed and the interest margin. Loan losses are not as big a deal as you might think.
Their stated growth goals set in spring 2022 were to hit 5% market share of 0-10 year old US used car sales by end calendar 2025,
revenue of $33-46bn in FY Feb 2026, and volume of 2-2.4m vehicle sales by then.
For comparison: Market share was 4.0%, revenue was a hair under $30bn, and volume about 1.4m, in the FY ended Feb 2023.
Jim
No. of Recommendations: 1
Jimkredux:
A question I've wanted to ask for years of a person with used-car business experience.
I have *never* seen a car I used to own show up on the streets. Once I hand over the keys, they vanish. This has been true in major metro areas as well as in rural counties.
I suspect it relates to my generally hanging onto cars until their wheels are about to fall off. The most recent example was selling my 1986 Ford Ranger in 1998, so as to buy a used (1995) 4Runner (which I still have).
I'm guessing these near-death $750 cars are bundled, wholesaled off and loaded onto a freighter to a far-off destination.
What do you think?
Thx
--sutton
No. of Recommendations: 7
There are many avenues for aged vehicles. Some are sold in large groups to Africa or the Middle East, usually Toyota in my day. Some are sold for parts to salvage yards. One particularly strange coincidence is that I sold a 1995 Jeep Grand Cherokee which I saw in Cancun Mexico when I was on vacation the following winter, 2007. It still had the village city sticker from when it was sold, as well as a very specific gash in the rear bumper cover.
Quite a few are wholesaled out of state as well. There were wholesalers from Texas that used to come up to Chicago to buy 30 to 40 of the same model, reconditioning them and selling them on into Mexico as well. We would work on locating batches of them to ship.
Jk
No. of Recommendations: 5
No. of Recommendations: 4
It is annoying that they stop share repurchases when stock is down so much. I guess they will restart when business booms and share prices are at a new high.
No. of Recommendations: 16
It is annoying that they stop share repurchases when stock is down so much. I guess they will restart when business booms and share prices are at a new high.
It is a shame.
I presume that it's a function of the fact that, all of a sudden, capital has a cost.
They aren't broke, but their cost of financing is up more than they have been able to raise rates they're charging, so they probably want to minimize borrowings.
The fact that gross margin per vehicle has held up shows that they are holding their reputation as a "flow" business:
they don't really care that much about the cost of cars, just how many they can sell.
Volumes are down because of economic weakness (combination of rates and slightly tougher times), but that presumably is just cyclical.
Despite the obvious things like revenue and profits being down, some nice indications.
Good percentage of cars financed, SG&A under control, larger percentage of sales online.
The fall in interest rate margins can't continue for long. At some point they will have to fully pass on the costs to clients.
I guess it's a delicate balance for them as their cost of funding rises--letting unit sales fall or making less on interest.
Rather to my surprise, Mr Market liked the results, up over 10% today.
Jim
No. of Recommendations: 8
Some interesting comments on KMX from the Sequoia guys:
I mean, I would maybe just put a finer point on it, which is, the cycle's not unimportant, we're watching it,
but we were aware when we made the investment that it's a cyclical business and every cycle is different. And so
we've talked about some of the factors that are driving this cycle, but really living through that is part of being
a long-term owner of this sort of business. What we are much, much, much more focused on is this omnichannel transformation.
And I'm going to be brief because it wasn't really in the question, but we believe the company is absolutely doing the
right thing. This is the direction of travel. Not everybody's going to want to buy a car online and have it delivered
to their home, but some people will. And more and more people are going to want to do some part of the purchase online,
even if they also want to come to the store to finish the purchase. So all the investments the company has been making
to be able to accommodate that, we think are worthwhile. What we frankly were surprised by is the amount of investment
that was required. And it's not to say the company isn't doing the right thing, but it was more than we expected, and
it has hit the P&L more than we would've expected. And that has bearing on the investment case. So it's something we're
watching very closely, but fingers crossed, they really are through the big ramp in the cost structure to basically
drive this transformation.Lots of other good stuff about NFLX, GOOG, SCHW etc.:
https://www.ruanecunniff.com/Download.aspx?ID=ccb5...
No. of Recommendations: 20
Some interesting comments on KMX from the Sequoia guys:...
Thanks for posting that.
It seems many Carmax investors are throwing in the towel, thinking the recent weakness is permanent.
I was having a glance at the Value Line report.
Not that I believe their forecasts, but they are often a good touchstone for the consensus of "the market".
In short, their expectations are very poor. They expect a share price in the $65-95 range 3-5 years out, which is where it is now ($83-ish).
It seems to be mainly because they expect growth, but with very low profitability.
They expect revenue per share 3-5 years hence to be up 20% from the past three year average (= growth at half the historical rate), but profits up only 2%.
They anticipate net profit margin of 1.7% - 1.9% now and into the future.
For comparison, the average 2013-2021 was 4.07%, lowest year 3.6%.
I'm not sure how they arrive at that 1.9% level of pessimism, other than assuming the past year is the permanent new normal.
Maybe they figure that Carmax's cost of financing will remain high with prevailing interest rates, but they won't ever be able to pass that along?
FWIW, if their revenue forecast is right but net profit margin rebounds to 3.5%, still below the old range, then EPS would be a pinch over $7, and today's price is just under 12 times that.
I think that sort of return to profitability (or more) is a more likely scenario. I think they will retain their long run success of growth, and will both deserve and receive good valuation levels after the cyclical and one-time issues.
Of course, as always I could be wrong : )
I'm currently a fair bit underwater, though that's not unusual.
Jim
No. of Recommendations: 16
Maybe they figure that Carmax's cost of financing will remain high with prevailing interest rates, but they won't ever be able to pass that along?
I happen to work for a captive. We mostly finance things bigger than cars but some things are similar no matter what you're financing. It's like working for a poorly run bank with high funding costs and the primary directive to help the parent company move units. To me it looks like CAF profited nicely during the ultra low rate environment and tight used vehicle supply in their fiscal 2021 and 2022 and that has started to revert back to more normal profitability levels starting in their fiscal 2023.
Looking at the numbers for CAF, their finance income as a % of total managed receivables was unusually high in 2022 at 5.4% compared to a more normal ~3.5% in 2020 and prior. Even the 3.2% through the first quarter of 2024 isn't all that unusual for them looking back to history. Over half of their 2021 business and all of their 2022 would have been funded at extremely low funding costs so no surprise they were highly profitable I would say. Things changed drastically starting in the first quarter of their fiscal 2023 as funding costs skyrocketed at the fastest pace since the credit crisis but their very profitable legacy portfolio probably held up the numbers for last year. I think the mid to low 3s is likely where they end up by year end.
Looking at the same finance income to total used vehicle sales revenue I see a long history of 2.9% up to their fiscal 2020 with a peak up in 2021 to 3.6% and 3.3% in 2022 and back to a normal 2.9% in 2023. That aligns with their pretty constant finance penetration of ~45%.
All that leads me to the opinion that CAF isn't that big of a concern going forward. KMX needs to flow about 4,000 used units through every store like they averaged for ten years up to 2021 and currently they are only flowing about 3,000 units over the last 12 months per store. Their fixed SGA expenses are hurting at those levels and they are doing their best to scale back but still support their growth ambitions. They continued to spend heavily on capex in 2023 and into Q1 which indicates they are committed to their growth plans, primarily through new retail locations. It might take another 12-18mo for the full pipeline of new and used vehicles to normalize but I don't see any reason they can't get back to their normal business by then.
Of course, the world could prove me very wrong.
Jeff
