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There was some interest in Car Max on the old board. I have not investigated the company but do have a little scuttlebutt: here's our experience at Car Max today.

They have lots of inventory, about 400 vehicles at this location. Everything we looked at was in nice condition and priced sky-high.

Example 1: 2023 Elantra Hybrid 5k miles priced at $30k, new MSRP $25.6k, described on Car Gurus as $3191 above market. Hyundai offering 4.9% financing on new ones, if you can get one.

Example 2: 2022 Tesla Model 3 RWD base priced at $43k, new Tesla price $40k and in stock at our local Tesla shop. The Car Max one should qualify for a $4k tax credit, the new one for a $3750 tax credit.

It's puzzling who would buy these cars. People that can't finance elsewhere, perhaps?

It's puzzling who would buy these cars. People that can't finance elsewhere, perhaps?

It's part of the story but not all of it.

About 25% of their customers pay cash or finance elsewhere.

Another 40% of their retail sales are financed in house with CAF. The average credit score is around 700 which is pretty good, but those customers still had an average contract rate of almost 10% last year.

The final 30% fall into their Tier2 and Tier3 categories which appear to be the riskiest in terms of credit. These are all sent out to third party and have no recourse to KMX.

The good thing for KMX is those last two buckets make up ~70% of their sales and don't seem to be very sensitive to interest rate. They are probably people that for whatever personal reasons just need/want a car and don't even think about the interest. Probably the same people carrying credit card balances monthly which is the majority of Americans.

Their yoy sales have been down now for five straight quarters. Annual per store sales are the lowest (outside of covid year) since 2010 and down about 15% from their average ~4k retail units per store. If we assume about 70-75% of their sales are not sensitive to interest rates then we could be close to a bottom here with upcoming Q1 in terms of per store sales. They are executing well by maintaining gross profit per vehicle ~$2,200/$1,000 respectively on the retail and wholesale side which continues to amaze me from an operational standpoint.

I own a few shares I picked up late last year and might add some more. The one thing that bothers me a bit is their lack of share repurchases recently when the stock price was in the 50s. They had been aggressive with buybacks prior 2020 and reduced share count 5-6% in some years. It was disappointing they didn't purchase any shares in Q4. My guess is the steep rise in rates has them spooked and they are conserving cash in case provisions for additional write offs need to be taken. And they also seem to be stuck in 'digital transformation' hell which is never fun.

I think it's reasonable they could be making $7-$8 per share within five years.

Jeff

I have not investigated the company but do have a little scuttlebutt: here's our experience at Car Max today.

They have lots of inventory, about 400 vehicles at this location. Everything we looked at was in nice condition and priced sky-high.



Thanks for that - it illustrates how there's still a lot of disruption in the used car business. I had the same experience recently - I wanted a 2-3 year-old Tiguan and the VW dealership quoted me prices higher than the new one I ended up buying.

I think the basic idea with CarMax is that they are an exceptionally well-managed, steady company that uses capital carefully and has been steadily growing for many years. They made about $888m in the year up to February 2020 (just before you know what hit the fan.) And they made $842 the year before that. They now have a market cap of about $11.4b, so they are trading at 13x the net income they had in 2018 and 2019. Then we had a global hissy fit, and lots of markets went crazy, used cars being a prominent example. That meant that CarMax had a great 2021 with its appreciated inventory ($1.15b in net income) and a terrible 2022 with no cars available ($0.48b). Based on 2022 alone, they are at 23 times earnings, but based on the 3 previous years, they are at about 11-13 times net.

Your scuttlebutt tends to confirm that they are still having problems sourcing cheap cars, and so their revenues and earnings will probably still be down this year. But this too shall pass, since I don't see any reason to think their business has been permanently impaired. In addition, they have traditionally repurchased a lot of shares, so even with lower earnings last year, their $3.03 eps is actually close to the 2018 level ($3.63) and higher than anytime in the 4 years before 2018.

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. And as their big online competitor Carvana circles the drain, they will be able to continue to take market share (which is still only at 4%) for many years.

dtb, 3% position

I was in a Carmax recently to sell my car. On the check in desk is a paper indicating all of the auto finance companies that no longer allow Carmax to pay off leases.

In the current environment all auto brands are doing what they can to control used inventory for resale. So they have cut off Carmax's access to re-market leased vehicles that they previously bought from customer want to get out of the leases. I assume that this is a substantial par of the market. I also expect that this policy will never reverse back to allow carmax to execute lease purchases in the future.

So Carmax can only buy owned or bank financed or leased autos. No longer any OEM captive leased autos.

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

is it possibly tied 2nd with DG?

brgds

is it possibly tied 2nd with DG?

DG?
Not lately. I like to play it cyclically, so I sold out last June (when DG price seemed strong) and put the money into BRK (when the BRK price seemed weak).
My assessment seems to have been fairly good: Back then you could get 90% of a BRK/B share for a DG share, now it's only 64%.
DG will be cheap again, and I'll be back. It's only down 16% from my exit.

My other #2 position is Alphabet.
To sum up the investment case: what's the worst plausible outcome?

Although I don't know the answer to that question, somehow I don't think it involves a permanent loss of capital.
They make oceans of money and I don't see that stopping.
Worst plausible case is probably a year or two of no net gain, which I can live with.

Jim

As DG was just mentioned in this thread: Anybody noticed what just happened today to another darling, DLTR, because of their Q1 results? Shares 12% down because of disappointing earnings plus lowered forward guidance.

Anybody noticed what just happened today to another darling, DLTR, because of their Q1 results? Shares 12% down because of ...

Pretty startling. (I don't usually look at the "because of" portion of most financial news items)
I'll have to do a fresh valuation and see if it's time to get back in. Probably so.

But then that's what I like about these firms.
It's a rare two year stretch that doesn't see a high that's more than twice the low.
The business tends to grow pretty steadily, but the valuation level is regularly all over the map.
Wait for it to be irrationally cheap, load up, wait for it to be fully prices, lighten up, repeat.
(or just wait for it to be irrationally cheap, load up, and fuggedaboudit, if that's your style)

I thought it extremely interesting what Mr Buffett said recently about why he didn't invest more in real estate: substantial mispricing is too rare.
What an impressively succinct line of reasoning.
By extension, good common stock investments with frequent irrationally large deviations in price from fair value are even better than stocks with steady valuations.

Jim

FBN reported that the reason DLT lowered guidance and missed was because of "shrinkage" (theft). Amazing.

I sold a few DG Jan24 200 puts for $14 today. Either I make ~12% on the capital at risk or I buy at 14.9x next years estimated earnings. Usually I'd like to get at least 15% on capital at risk but I'd really like to own DG at that price. DLTR ist still a bit expensive in my view.

I sold a few DG Jan24 200 puts for $14 today. Either I make ~12% on the capital at risk or I buy at 14.9x next years estimated earnings. Usually I'd like to get at least 15% on capital at risk but I'd really like to own DG at that price.

DG does look a little cheaper than usual.

For a quick sense of scale, this gives a quick snapshot of typical valuation levels in the last decade or so, Value Line style.
http://www.stonewellfunds.com/DGmetrics.png

The metrics for a given date are for the financial period ending on that date, then interpolated linearly.
Therefore there is a bit of crystal ball effect...the financial figure shown isn't known till maybe 7 weeks later.

The final data point uses yesterday's closing price of $203.61

Compared to the whole decade of history, that's 6-8% cheaper than recent years on all three metrics.
Compared to the (more exuberant) history only since September 2019 it's 16-22% cheaper than recent years on these three metrics.
The higher recent valuations recently weren't nonsensical...net margins averaged around 5.5% in the first half of that graph and 6.5% in the last half.

Jim

Full disclosure-- I own KMX. In Orange and LA counties I'm seeing all sorts of signage promising to buy your car from all kinds of dealers. It is competition that they didn't have years ago, right?
Also been looking for a truck for a hand-man of mine. Seems like a new lower priced truck is maybe 10% less than what they are trying to sell a used truck for. As Warren said at the AM, the supply changed faster than most companies realized.

I don't follow DG but I just took a quick glance.

Any concern with the amount of debt they have been adding? It has increased from 2,865 in 2019 to 7,009 in 2023. This increased the Debt/Equity ratio from .44 to 1.26.

Wait for it to be irrationally cheap, load up, wait for it to be fully prices, lighten up, repeat.
(or just wait for it to be irrationally cheap, load up, and fuggedaboudit, if that's your style)

I did the latter actually. I don't like to time things all that much, except when they get cheap enough'BRK especially. Got lucky I guess in 2021, and bought a large chunk of DLTR in the mid eighties. Failed to pulled the trigger the following year when that positioned doubled. I believe Jim bailed out at some point. I'm still holding. That's the difference between a know nothing investor (ME!) and one who has more impeccable timing and better micro understanding of the company. I find that buying decisions are easier for me, but selling is awfully hard. I get attached too easily to the story. Well, I guess at least I have established a bit of a margin of safety in DLTR, unless they make a mortal mistake going forward. I liken the 'shrink' issue to the AMEX Salad Oil crisis, a temporary mis-pricing that can be solved in time, but will cost some $$. That's Cramer's take on it anyways'even though I'm not a fan, I think he's right this time. Fix it, or else. https://www.cnbc.com/video/2023/05/25/crameras-mad...

I went into my local DLTR the other day. I never really shop there'just wanted to observe the traffic'ahem'ended up walking out with some stationery items, a couple kitchen utensils, a large 2 liter bottle of Coke (I rarely drink the stuff, lol, but'), and something else I've been addicted to lately ' those Russell Stover dark chocolate mint patties by the bag. It's not Sees chocolates but they're pretty damn good for my palate anyways. It's a brand I always remembered seeing on shelves in the markets here growing up in New England. So, now I have to make a quick stop at DLTR every couple days to grab some chocolates before heading over with friends at the coffee shop. Not bad for a buck and a quarter.

Took a look at DG as well and started a small position @204. >20% off its high and near 52-week low, 41% ROE, 50% Rev. growth over last 4 years ($38B), 10% earnings growth yoy, 9% op. margins, 16% annual 5-year growth rate, 21% payout, tiny short interest, currently priced the same as Fall 2020 despite good growth. Not crazy wrt debt/equity however.

DG seems well-positioned relatively speaking with likely economic slowdown and a tighter consumer. Their stores seem to have a steady flow of traffic around here in the Southeast. Who knows but I'd not be surprised to see it priced 20-25% higher over the coming year.

So, now I have to make a quick stop at DLTR every couple days to grab some chocolates before heading over with friends at the coffee shop. Not bad for a buck and a quarter.

Check out the oatmeal cookies. They are quite good and made in the US. Either plain or frosted.

I posted the below on the KMX board, but then noticed that the last post there was almost two months ago. Since KMX is being discussed here and the traffic is greater on this board, I decided to post it here as well.

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Valueline estimates that KMX's EPS in the years 2026-2028 will be $4.40.

Also, the median P/E of KMX in the last 10 years has been 18. If we assume that multiple to apply in 2026-2028 (which, in my view is a very optimistic assumption, given the growth rate of EPS from now to then), the expected price then will be $79.20, as against a current price of $74.66.

KMX pays no dividends so if the assumption above bears out, we're looking at a 6 percent total return from now to 2026-2028.

Is anyone else concerned about this issue?

What do you assume happens to the earnings that have accrued over that time? Share buy backs, reinvestment? According to Roic.ai, current ttm eps is 3.6usd meaning about 4.8% earnings yield and if we assume 4.5-5usd per share is more reasonable then we have a yield of 6-6.6pct

Valueline estimates that KMX's EPS in the years 2026-2028 will be $4.40.

Also, the median P/E of KMX in the last 10 years has been 18. If we assume that multiple to apply in 2026-2028 (which, in my view is a very optimistic assumption, given the growth rate of EPS from now to then), the expected price then will be $79.20, as against a current price of $74.66.

KMX pays no dividends so if the assumption above bears out, we're looking at a 6 percent total return from now to 2026-2028.

Is anyone else concerned about this issue?

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 wether you think they can get back to their historical margins. I'm betting they can.

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

Jim, I admire how you're able to distill your thoughts into a short few sentences!

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?

Sure but people still need cars to go to work etc. They'll get used to higher rates.


The chaos of supply over the last couple of years made everything anomalous.

That's key to my thesis. I don't think it makes sense to extrapolate the post corona years. They may not get back to pre-corona EBIT margins of 6.5% but I'm pretty sure they can achieve a 4% EBIT margin like prior to 2008 when interest rates were higher.

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.

Same with DG, I wish they'd increase buybacks at these prices!

When is the optimal time to roll options?

Jan 2024 options purchased in spring 2022 are still considerably under water.

Is it better to roll on an up day? A down day?

Currently 6 months out to expiration. Better to wait until closer, or asap?

Any other considerations?

Is it better to roll on an up day? A down day?

Ideally you want to
* Roll as seldom as possible, since the bid/ask gaps are horrible making trading expensive.
So, generally it's better to roll every two years than every one year.

* Within the constraint above, roll at an early date.
Time value evaporates more and more rapidly as it gets closer to expiry.
So avoid the last 3 months if you can.
In particular, if you sell less than around a month before expiry the bid/ask gap is often bigger than the remaining time value,
so you end up not even being able to sell for the in-the-money value. This is definitely something to be avoided.
(if a rain cheque lets you buy a $20 dinner for $10, you don't want to sell that rain cheque for $9)
At Interactive Brokers there is no fee for exercising options, so when I've occasionally found myself in that situation
I have exercised the calls and sold the stock, a bit at a time, which avoids the need for a decent bid in the options market.

* The best day to BUY a new position is when the price is low, obviously.
But the best day to ROLL is when the price is as high as possible and the market is calm. (and forecast interest rates low!)
That's because, when you're rolling, you are a net buyer of time value.
You are selling something with a small amount of time value
For any given strike price, the time value is lowest when the stock price is as high as possible relative to that strike, and when the market (and that stock) is calm.
A high price is good because the implied interest rate at any given strike is lower.
Or, looked at another way, for the same interest rate you can use a higher strike, meaning you are tying up less cash.

Often you can roll to a considerably higher strike and the roll transaction will free up cash, often permanently.
This is essentially how I feed myself. It doesn't happen every year, but it generates a lot of cash when it happens.
A portion of my portfolio can be thought of as a perpetual set of calls expiring 1-2 years later, with a strike price around $X lower than the current stock price.
I will stop this when the expected value growth rate from Berkshire minus the implied interest rate is not a big enough gap, causing the party to end.

So, overall, the ideal time to roll would be when interest rates are falling, on a day that the stock price is high,
at nearly the earliest date that the two-year options are available.
(not the first few days...liquidity seems to take a couple/few days to appear for a new contract)

Jim

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