Sunday, February 17, 2008

CarMax KMX Analysis

KMX is mostly a used car dealer with attention to quality, no haggle pricing and low prices. It offers to remove the hassle in used car buying. I checked out the website and the prices for the cars I saw were cheaper than the ones available with the dealer. KMX also has four new car selling facilities. Given the mix of new vs old cars ( 30-70 ) as well the expansion plans of KMX, it is likely that KMX will continue to see volumes of scale as it expands.

KMX was spun off from circuit city stores in 2002 as an independent entity, KMX was founded in 2002 in Virginia and currently has 81 stores in the country with most stores in Florida, Texas followed by California. Florida and California are hit heavily by the falling house prices and the general economy continues to cool off with impact on consumers. Let us see how this impacts KMX. The new car sales dipped in 2007 ( 11%) where as the used car sales went up (20+%). As the economy cools, it will be interesting to see how the mix changes in the first couple of quarters for KMX.

KMX has another revenue stream through auto financing operations. The company provides the following guidelines for 2008.

Fiscal 2008 Expectations
The fiscal 2008 expectations discussed below are based on historical and current trends in our business and should be read in conjunction with “Risk Factors,” in Part I, Item 1A of this Form 10-K.

Fiscal 2008 Sales. We currently anticipate comparable store used unit growth for fiscal 2008 in the range of 3% to 9%. We also expect wholesale unit sales growth to be consistent with our total used unit sales increase. Total revenues are expected to climb by between 14% and 20%, reflecting our expectations for comparable store used unit growth, new store openings, a modest increase in used vehicle average selling price, and a continued decline in our new vehicle sales.

Fiscal 2008 Earnings Per Share. We currently anticipate fiscal 2008 earnings per share in the range of $1.03 to $1.14, representing EPS growth in the range of 12% to 24%. We expect modest improvement in both used vehicle and wholesale gross profits per unit in fiscal 2008, as we continue to refine and improve our car-buying processes.

We expect CAF income to increase modestly, but at a pace slower than anticipated sales growth, primarily reflecting the challenging comparison created by the $13.0 million of favorable CAF items reported in fiscal 2007. The CAF gain percentage is anticipated to be slightly above the midpoint of our normalized 3.5% to 4.5% range in fiscal 2008, assuming no significant change in the interest rate environment.

The stock is not cheap but has potential for further growth in a vast market. The price to cash flow and P/E are somewhat high and the growth will be low this year. The ROA and ROE are not very high compared to other established businesses. While the concept clearly holds potential, the bet here is nation wide expansion of KMX over a period of time will increase efficiencies and EPS.

Valueline expects the company to post reduced margins over the next few quarters but do well over the long term as KMX is one of the finest companies in this category. Value line expects double digit bottom line growth for the next three-five years.

Sunday, February 10, 2008

Microsoft and Yahoo! Merger

Microsoft is trying to buy Yahoo! at a price of $31/share. Barrons analyzed this deal and said the price Microsoft is paying is low when compared to the Acquantive acquisition. Henry Blodget, the former internet analyst has this to say about this deal in his blog.

"The first problem with Microsoft's online services division is the name: Microsoft's online services division. MSN, Windows Live, Office Live,, aQuantive...we'd feel better about the company's chances if it could begin by settling on a brand (or at least a couple of brands).As for last quarter...Online revenue jumped 38% to $863 million, for an overall annual run-rate of a respectable $3.4 billion. Of that, $623 million was advertising ($2.5 billion run rate), making Microsoft's ad business one-seventh of Google's size and about one-third of Yahoo's size.Of the advertising business, which also grew 38% year over year, $112 million came from the aQuantive acquisition. Excluding this, the division's ad revenue grew 24% vs. 25% last quarter. This means Microsoft almost certainly lost more share to Google in the quarter, but may have picked up a small amount against Yahoo.Most importantly, despite the acquisition of profitable aQuantive, Microsoft's online business is still burning money--$800 million a year (after factoring out some non-cash charges). This is an improvement vs. Q207, when it was losing $1 billion a year, but it's still horrible. Even walloped AOL is still printing money. Microsoft's online successes, such as they are, won't be taken seriously until the company is running a large, organically growing, profitable business."

Let us look at the latest numbers from Q2 of 2008. The numbers thus far in 08 is 1.5 billion in revenue with 500 million dollar loss. Yahoo! on the other hand had revenues of ~7 billion with approximate profit of 660 million. Combining the two entities by themselves would result in about 10 billion in revenue with about 340 million in loss. This is without adding any cost saving, talent loss and special incentive packages to retain executives and employees. If one billion is cut from costs it will result in about 600 million in profits. This is not including the increase in cost structure to retain key employees and managers.

This compares to 16 billion in revenues and 4 billion in net income at Google. As can be seen, from the business stand point, Google is ahead and continues to pull ahead as Microhoo! gets bogged down in getting the merger to work.