Halls of Shrewd'm / US Policy❤
No. of Recommendations: 3
This stock has been a stinker for about 3 years, and today it got extra stinky.
Down 16% at the moment after earnings release this morning.
https://www.barrons.com/articles/carmax-earnings-s...
Shares of Carmax sank Thursday after the used-car dealer reported fiscal-fourth-quarter earnings that missed expectations and management sounded the alarm about the looming impact of auto tariffs.
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“I think it will it will push some folks into looking at used cars, late model used cars, which is interesting because that’s what we’re seeing a lot of interest in right now,” CarMax CEO William Nash said Thursday. “Now, I think over time, what could happen is that the used car prices will also go up.”
What’s more significant, in Nash’s view, is the higher cost of auto parts. “The other thing to think about on the tariffs that impacts our business as well as any anybody that sells used cars, it’s just the parts piece,” he said.
CarMax must find ways to offset those increases, the CEO continued. Still, he struck an upbeat tone on the earnings call, asserting the company manages inventory “better than anybody in the business.”
No. of Recommendations: 6
I admit to being not entirely clear on Mr Market's reasoning. (worst performer in the S&P today)
Carmax is primarily a "flow" business. They buy used cars, market them up a relatively constant amount, and sell them. Duds are sold at auction to other dealers, so there is a slight reputation for dependable cars. Profits are primarily a factor of turnover, not price levels---the price of cars is not that big a factor in their business success.
So, with that in mind, presumably the price of car *parts* is an even smaller issue for them. I'm sure they do some repairs before flipping a vehicle, but they are not in any significant way in the business of repairing cars at a fixed cost.
Is a car parts price hit that really that big a factor?
Other changes:
The average new car price is certain to jump upwards with this hour's estimated tariffs. Presumably that is good for the value of their current inventory, and also good for the relative attractiveness of used cars versus new. It may be a headwind to volumes going forward as affordability slides for both new and used as disposable incomes fall, but for many in the US a car is not really optional. In a very top level view, chaos causes ownership churn which is good for volume.
Seems a bit of an over-reaction, unless I'm really missing something.
Jim
No. of Recommendations: 3
Profits are primarily a factor of turnover, not price levels---the price of cars is not that big a factor in their business success.
But volume will decrease as prices rise, right?
tecmo
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No. of Recommendations: 1
Glad I sold my KMX shares back on March 7th. I was reviewing my portfolio for positions that were ripe for selling to raise my cash levels, and I decided I had waited long enough for KMX to turn things around and I didn't see any compelling reason for it to be in my portfolio.
Got lucky on my timing for once.
No. of Recommendations: 5
Profits are primarily a factor of turnover, not price levels---the price of cars is not that big a factor in their business success.
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But volume will decrease as prices rise, right?
Sort of, but not nearly as directly as you might at first suppose.
Remember, these are not new cars, so the simple supply/demand curve logic of new cars doesn't directly apply. For every buyer of a used car, there has to have been a seller of a used car. The first may decrease in propensity to trade with a higher price, but the second might increase propensity to trade, and it's mainly the number of transactions that matters.
And even though the buyer is normally price sensitive and subject to the usual supply/demand curve, it's not always the case: if new car prices soar, this increases relative demand for used cars, making them a type of Giffen good. For example, if new car prices rise 25% (BMW tariffs), but used car prices rise only 10%, the demand for used cars can actually rise in the face of higher prices.
Occasionally chaos and turmoil during recessions can increase car trading volumes even as affordability falls--lots of repos, for example. The clearing price may fall, but the volume may hold up. That's not the general rule, I'm just pointing out that it's not all a simple linear relationship. Arguably something like the attractiveness of car leases 3-4 years previously may be a bigger predictor of used car volume than current used and new car prices.
Jim
No. of Recommendations: 5
"Is a car parts price hit that really that big a factor?"
Maybe if we think about in terms of their $2322 gross profit per retailed unit it could be material. If we randomly assume $2500 reconditioning per unit and say 60% or $1500 is parts, a 10% increase in parts cost due to tariffs would lower the gross $150. Scale to 100% plus for chinese tariffs and I can see why Nash brought it up several times during the call. Their total blended parts price increase will not equal the tariff rates so it won't be that dramatic but it would weigh on the business some.
I listened to the call and the analysts were congratulating them on a good quarter. I didn't hear anything that concerned me. Much like all their previous calls they seem to be executing their plan and they are extremely good operators in a difficult business, and very disciplined in their process in my opinion.
The only thing I heard that some might not have liked is CAF saying they will be provisioning for loan losses at a higher rate than they have historically. However, they were very clear this is only due to the strategy at CAF to bring some of the non-prime business back to CAF that was going to their Tier2 and Tier3 partners. As long as they are pricing for it appropriately I don't see any reason why they won't be successful. Their average retail loan rate is already over 11% so they know this space very well in my opinion.
They need per store volumes to increase which has finally started here in the last year. If it can continue they should do well.
Jeff
No. of Recommendations: 1
Remember, these are not new cars, so the simple supply/demand curve logic of new cars doesn't directly apply. For every buyer of a used car, there has to have been a seller of a used car. The first may decrease in propensity to trade with a higher price, but the second might increase propensity to trade, and it's mainly the number of transactions that matters.
If new car prices rise; it would be logical to assume that will result in less buyers for new cars, thus limiting the number of resell cars that hit the market.
Occasionally chaos and turmoil during recessions can increase car trading volumes even as affordability falls--lots of repos, for example. The clearing price may fall, but the volume may hold up. That's not the general rule, I'm just pointing out that it's not all a simple linear relationship. Arguably something like the attractiveness of car leases 3-4 years previously may be a bigger predictor of used car volume than current used and new car prices.
Agree that the car lease market is probably the best indicator of future volumes....
tecmo
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No. of Recommendations: 4
If new car prices rise; it would be logical to assume that will result in less buyers for new cars, thus limiting the number of resell cars that hit the market.
For sure. But only after a few years of lag.
It's a very odd business, in that sense. All kinds of factors affect the flow like how big the new car market was a few years earlier, finance affordability then, finance affordability now, leasing and fleet market shares, what new car prices are doing, how many car owners are in distress to the point of seeing repo, how the economy is doing (good vs early recession vs late recession)...
I find that the market frequently tends to focus too much on the factors affecting the *price* of cars, and not enough on the factors affecting the turnover rate.
Jim
