KMX - Has Carmax finally maxed out?

[Ridn2lo]

What’s up everyone. So on 12/22/2021, Carmax will be reporting their earnings for Q3 2022.

I’m a little on bearish on Carmax due to current economic events going on in the U.S., and think that they might suffer a nice drop after this upcoming earnings report.

CarMax is a used vehicle retailer based in the United States. It operates two business segments: CarMax Sales Operations and CarMax Auto Finance. The corporate entity behind the formation of CarMax was Circuit City Stores, Inc. The first CarMax retail location opened in September 1993. Carmax has a little over 220 stores across the country employing about 27,000 people.

For Carmax’s Q2 2022 earnings reported 09/2021, they did not exactly knock it out of the park in comparison to the previous quarter.

For their Q1 2022 report, they did great on earnings and saw a nice jump in stock price the days following.

As you can see, Carmax saw a nice bump in their Q1 earnings. A lot of this growth though during the period was due to the Covid boom. Prior to pandemic March selloff in 2020, Carmax had a high of $103.18 in 02/2020 before dropping to a low of $37.59. Since 03/2020, it has been on a tear hitting as high as $155.98 this past month on 11/2021.

The auto industry has taken a beating during 2021 due to semiconductor shortages and supply chain issues with other materials thus causing the reduction in production of new vehicles. Because of this, the used car market has seen a massive boom over the year due to highly inflated pricing. Used car values saw up to a 10.5% increase on prices which in part led to some of the large inflation numbers that we have seen in the past CPI data reports. These are also the percentage rate increases that were occurring during Carmax’s Q1 period.

But over the last few months, CPI data has shown that those percentage increases in used car prices has been steadily declining. And I believe that was reflected in Carmax’s Q2 earnings report as you can see with their losses in net income, profit margins, etc.

Carmax also does their own in house financing with Carmax Auto Finance. From their Q2 report, CAF income increased 35.9% to $200.0 million, primarily offset by a $35.5 million loan loss provision compared to $26 million in the same period the previous year. That’s a pretty decent loss in loan revenue and I can only imagine that figure will continue to climb.

So due to the declining inflation percentages on used car prices, scaled down production of new vehicles by auto makers, and the remaining difficulty in acquiring reasonably priced used inventory I am feeling strongly that Carmax’s upcoming earnings report will be lackluster. Details from their last report stated that they had opened 3 additional stores so far in 2021 with a plan to open 10 more. They also announced they had repurchased 1.8 million shares for $220 million dollars. They also said they are still eligible to repurchase an additional $900 million worth of shares. So with increased operating costs also thrown on the table with the other factors at play, I expect to see a decent drop over time as the Covid pump wears off for them.

I had similar convictions for their last earnings report, and puts panned out well for me. I will also be looking at puts on this earnings report as well.

This is not financial advice and please do your own research.

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[Sunny2456]

There’s a nice gap+support at 122.50 from the looks of things. $140p for 12/23 has a 2 dollar bid/ask spread and mid is $4.50 as of now. Other than the first drop coinciding with spy on 11/22/23, carmax dropped $149 to $144 and its sitting around that bottom now. 2 weeks out but seems like a good play.

Personal anecdote out of the few friends that have bought cars, most of them bought thru Carvana (as slow as they are giving out plates). I haven’t heard too much about Carmax from the clients I talk to too. Carvana hit its peak mid August, and has now declined to pre summer prices for now. Compared to them, Carmax pre summer was in the $130’s.

I found a nice play from the end of October on tradingview which turned out well for the poster but I’ll be looking further back into the chart to really look into this play.

[Ridn2lo]

I personally have seen Carmax along with Carvana making bids up to $5k on cars before they even hit the auction lane. I have also sold a few cars to Carmax for values higher than what the vehicle is worth. They are dropping some major dollars to acquire whatever inventory they can, but those costs can only be spread out onto the customer so far when it comes to reselling.

[Sunny2456]

Correct and right now general sentiment is “oh well its more expensive due to covid”, and that’s true for the most part but at the end of the day how much of that is eating into Carmax’s bottom end on top of the growing cost of wages? Good early find so we have time to look into this. They burned thru quite a lot of their cash on hand from q1 to q2 but the question is did they spend it wisely for example on buying cars to continually turn out profit, or was the profit just not enough?

[Ridn2lo]

That decrease in cash on hand may have something to do with the 1.8 million shares they bought back for $220 million. That seems on par with the difference between their cash on hand between those two quarters.

[ripvik]

I’d be very careful with Carmax. I’ve researched some used car salespersons and independent dealers and many think that it will be q1 2023 by the time the used car market settles. Purely anecdotal of course but it’s something to consider. As well, it is still very difficult to get cars at MSRP in most places in the US. People are trading in used cars for high values, yes, but they are also unable to buy new cars consistently so unless they had extra cars they now have to turn around and purchase a used car.

Also Carmax’s cash on hand allows it to weather operational costs more than competitors which is good for them since they suspended Appraisal Cost Recovery. So competitors that match Carmax’s rates may struggle to compete and will then lose out on vehicles.

Used car prices may be declining but the demand is still there. As workplaces continue to open up then the demand for cars will continue to recover to pre-pandemic levels, and chip shortages clearly won’t be resolved anytime soon.

Also Carmax is still able to sell cars at good prices. There are lots of recent stories of people selling and buy to and from Carmax all at once. Also I read anecdotes of people knowing they could get more from private sales, but going with Carmax due to the incredible ease of their service.

They may go down at earnings but from the bit of research I’ve done it seems like customers view them quite positively!

[Ridn2lo]

Good points. Nobody can get anything at MSRP right now. And nobody right now can get private party pricing anywhere near as high as what Carmax, Carvana, etc. is willing to offer for inventory.

[Ridn2lo]

@Conqueror My bad on not adding the ticker to the title.

[internetkings]

I have seen article after article saying, used car prices are up and up - from Covid. I don’t have a position on this either way - but I think earnings could be decent - gotta assume some decent PPP loan money and influx of sales from the various stimuli.

[Ridn2lo]

They got their boost from Covid in the earnings before last. Stimulus has been over for some time now. PPP may have reduced their overhead with payroll and allowed them to use profits for expansion, but you can only expand so far if the costs of expansion is increasing as well. Car prices are still up, but that is because of supply and demand. Sellers can’t keep up with supply versus the demand of buyers, and therefore they’ve had to resort to paying higher prices for inventory. But those high prices can’t be sustainable forever, and those extra costs can only be passed down to the buyer so much before it kills demand all together. Taking smaller profit margins has been a key factor in survival for most auto dealers. Carmax is no exception.

Also, demand may also be declining due to rising gas prices. People will start to seek other means such as public transportation, or carpooling. Plus a large amount of people simply work from home now, so that will affect demand as well. I personally feel like a solid amount of the high demand during Covid came from people transitioning into delivery style jobs, and needing a better means of transportation for that venture.

[Ridn2lo]

Upon further research in Carmax, I’ve found that institutional investors hold a majority ownership of KMX through the 97.04% of the outstanding shares that they control. This interest is also higher than almost any other company in the Specialty Stores industry.

[notmisa]

I personally don’t think it’s worth shorting/putting. CVNA had a max dip from previous day close to morning dip of about ~8% and that was with a smaller float and then it made a terrific recovery.

I’m thinking that the revenue will be there to continue to cover operational costs since Carmax has very low overhead. Another factor is the fact that prices have increased, as you guys mentioned, due to chip shortages and inflation. With the world re-opening, I think this is the perfect opportunity for Carmax and Carvana to capitalize on demand.

Will watch from the sidelines on this one. Good luck.

[Ridn2lo]

My Carvana puts printed nicely the morning after they reported their Q3 earnings. It closed previous day above $300 on 11/04 and hit a low $275.33 at market open on 11/05.

I am expecting to see the same with Carmax. Carvana’s operating costs are way less than that of Carmax. And they can’t really capitalize on demand from the world re-opening because they are having a difficult enough time acquiring profitable inventory to capitalize on the demand that exists currently.

[Ridn2lo]

Posting an update to keep this potential play up to date. Since posting this DD, Carmax has climbed in value about $5 to a price of $149.48. CPI data just released showed that the inflation rate for used cars remained at 2.5% as it was the previous month. Still expecting negative results from their Q3 2022 earnings reported on 12/22.

Also I have noticed that the OI for $140p for 12/17 and 12/23 substantially outweighs the OI on any other options strike in puts or calls. Very interesting indeed.

[Sunny2456]

2400 OI on 240p, very interesting. Wonder if people are looking to play a drop towards earnings. I’ve seen large OI on some options a few weeks out but then it ends up being best to sell 1 or 2 days after rather than hold. I’ll probably buy and ride the wave but I hate the spread on it right now.

Edit 12/18: revisited this thread and realized I was looking at carvana ticker instead of carmax. Nevertheless, a 240p would have been a good play.

[Ridn2lo]

$140 puts have been a nice play on this thus far since my write up, and we haven’t even gotten to earnings yet on 12/22. Still keeping an eye on this closely as I still do not have a good feeling for their earnings. Will possibly be working on a new DD for Carvana soon to possibly play off of bad press they have been receiving, and as a future play on their next earnings based off of the outcome of Carmax’s upcoming earnings report.

[Jamnbutter]

Put options for 125 and 130 are a bit pricey. Is it too late to enter?

[Ridn2lo]

Well I turned out to be wrong in my assumption that Carmax would miss on this earnings report. Surprisingly, the stock is falling today. My assumption on this is profit taking, or investors cutting now because they don’t project Carmax to retain this growth with the pandemic coming to an end even though the used car industry is expected to be on edge until 2023. I fortunately was able to pull out of my put position somewhat profitable, but will continue watching for a few more days to see if it continues dropping like it did on it’s last earnings. This was much like other earnings plays in the sense it was better to play on the weeks before earnings, and possibly for a few days after earnings.