KMX reports Q418 results on 3/29. We lowered our unit comp to 2.5% from 6% our EPS to $4.99 (was $5.17) with lower SBC helping EPS. We also make modest cuts to 2019 and 2020 est. (Exhibit 20).
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Our analysis suggests that the current version (v1.0) of Mobility on Demand (MOD) is more concentrated than investors think—8 cities account for more than 50% of all US revenue. Expanding beyond these areas requires the cost of MOD to become much more competitive (with private vehicle ownership) than it is today. We illustrate how difficult this will be… at least under the current, human operated model.
U.S. sales have gotten off to a slow start—with 16.6 MM SAARs in both Jan and Feb (Note: 2018 was 17.2 MM). While this is consistent with our forecast (16.7 MM SAAR for this year), this prompted a flurry of calls regarding the state of industry inventories (which ended Feb at 77 days, 7% above “normal”), and potential risks to production (impacting OEMs/suppliers) and/or pricing (incentives from OEMs). We revisited our production assumptions and concluded that inventories can easily be brought back in-line with historical levels based on a normal seasonal uptick in sales, and very modest (100k) adjustments to production.
In April 2015 Fiat Chrysler’s then CEO Sergio Marchionne surprised the Street with an impromptu presentation calling for Auto Industry consolidation. The presentation focused on 2 points: 1) The Auto Industry had not earned its cost of capital over a cycle, and; 2) Consolidation is the key to remedying the problem. At the time Marchionne argued that achieving greater scale and eliminating duplicative investment could have meaningful benefits. Clearly, this call did not pan out.
Tenneco reported much weaker than expected 4Q18 EBITDA (significant earnings declines in each of the legacy Tenneco businesses) and weaker than expected 2019 guidance before the open on Thursday (2019 VA margin guidance of 10.4% corresponds with 2019 EBITDA in the $1.6 bn range compared with consensus of $1.7+ bn). The risk/reward for this stock was set up poorly heading into the print, as there was limited disclosure/transparency into quarterly pro formas for the Federal Mogul acquisition (this was the first quarter to include FMO), there were adverse trends within all three legacy TEN segments (margins were down materially), and TEN is now saddled with relatively high leverage (3x net debt/EBITDA). Tenneco’s shares fell 15% for the day.
This afternoon (03/14/19) KBRA Ratings was first on scene in issuing a very thorough Pre-Sale report on the Carvana 2019-1 ABS. Gracefully, they have allowed us to republish some of the data. But you can find the full report here. Overall though, the Carvana Pre-Sale is more supportive to our thesis than expected, given preliminary ratings and that the issuance includes a lot of the deep subprime loans that were likely previously going to an unnamed receivable purchaser (this concerned investors).
Wolfe Research Senior IT Hardware & Networking Analyst, Steve Milunovich, hosted a webcast with Dan Galves, Wolfe Autos Analyst, and Horace Dediu. Topics for discussion included the coming unbundling of transportation, micromobility and why could it be more important than autonomous vehicles, and the early usage statistics and vendors.
This afternoon (3/12/19) CVNA filed an ABS-15G for a due diligence report related to its first ABS - Carvana Auto Receivables Trust 2019-1. This is a massive catalyst that we have been waiting for, and candidly, it is occurring a year or two earlier than we were expecting (though we did find a hint in the 10-K). We think an ABS deal could serve as a double catalyst. First, it will significantly lower the funding cost of CVNA’s financing business. Second, IF the ABS is broad enough to include some of its Deep Subprime loans (Exhibit 5), it will fully dissolve a leading bear thesis that Carvana has been over-earning in its credit business with quasi related-party agreements.
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