No. of Recommendations: 6
I don't know what the Street explanation for the 10% drop is, I suppose disappointment that there are no signs of earnings recovery so far, but a 10% haircut seems like overdoing it, based on no particularly bad news.
$0.75 eps was compared to last year's Q3 with $0.79, or $118.6m instead of $125.9m.
At a $69 share price, that means that by my calculations, trailing 4 quarters' earnings will be down from $460.8 to $453.5m. With a market cap of $10.9b, that means they are now trading at 24x earnings. So their's still an implicit assumption that they can get things back on the rails and go back to their pre-COVID $850m+ of 4 years ago, not necessarily needing to get back up to the $1b+ they got in COVID years. Their current price represents a 13 multiple on that hoped-for $850m.
Is a 13x multiple on a hoped-for return to profitability levels too low or too high?
Well, on the one hand, the share price 4 years ago, in Feb 2020 when they had made $888m in net income for the previous year, was about $100, based no doubt on the steady gains in revenue and net income over the previous 5 years. It seems that $69 might be a high price to pay for a situation where the company has most certainly NOT been doing very well over the past few years - shouldn't it get a lower multiple based on (a) the $888m is not here today, it's just a hope, and (b) the company can not be said to be growing its earnings as reliably as it seemed, 5 years ago.
On the other hand, we do have 4 more years of growth in hand, not in earnings, granted, but at least in cars sold and in revenue. Revenues for the Feb 2000 year (representing 12 months from Feb 2019 to Feb 2020, i.e. entirely pre-COVID) were $20.3b, and for the most recent 12 months they were $27.0b, 33% higher, so there's that. And if you look at the general market, from Feb 2020, the S&P is up about 32% and KMX is down about 30%. So under the assumption that the company gets back to its earning level of 4 years ago, you're getting it about 50% cheaper now. And with 33% more sales, if the company can regain its 2020 margins and its P/E multiples from then, then you are looking at close to a double, from about $69 to about $133.
I added about 50% more shares to my position at $70, based on the lower price, with nothing substantially wrong with the company's recovery hypothesis, as far as I can tell. I still think the basic model is intact, that being that it is a good company selling an essential product in a slightly better way than its competitors, with a fixed price representing a gross profit of about $2000 per car. And that is in an industry where their 4% market share (3.5% 4 years ago) gives them a long runway for organic growth. I can't really say I see any signs of recovery yet, but no reasons to think they won't get their act together. In the meantime, I am encouraged that they have reactivated their share repurchase plan, which seems like a good use of liquidities while the market plays wait and see.
dtb
