KMX reported Q3 2018 pre-market. Used unit comps of -1.2% were below Cons. of 0.7% and our 0% but met the scrape bar. Adj. EPS of $1.09 beat Cons. of $1.00 and our $1.01 as Wholesale, CAF, tax, buybacks and SBC made up for a short fall in unit sales. Shares are +4% vs. -1% tape.
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KMX reports Q318 results on 12/21. We are lowering our unit comp to 0% from 3%, offset by lower SBC, so our EPS stays at $1.01. After addressing 4 focal points, we find it difficult to be constructive when industry demand is eroding and spending needs are increasing. However, trough valuation keeps us at PP for now. We are lowering our PT to $64 (was $75).
This AM (12/4/2018), KMX announced the rollout of its new omni-channel offering that it’s launching in Atlanta. KMX plans for it to be available to a majority of its customers by Feb. 2020. In its FQ2 call, KMX said that it would bring this experience to a major metro market by year end; however, it did not name the market nor signal a timeline for a broader roll-out.
Once a quarter, we comb through corporate filings and summarize the most noteworthy datapoints. At a high level, developments during the quarter reinforced our view that investors should be Underweight Autos and Auto Parts, Underweight Dealers, and Overweight a relatively small selection of companies that fall into the Auto 2.0 category. In our view the U.S. Auto Cycle is in its 8th or 9th inning, with looming pressures on vehicle affordability. China is experiencing its first real Auto Industry downturn, and we are not convinced that the Central Government will step in to specifically prop up Autos. Europe also faces a number of challenges: These include potential trade risks (7% of Europe produced vehicles are exported to the U.S.), political risks (Brexit), and regulatory risks (vehicles more expensive to produce, at the same time that pricing has become more challenged).
We’ve met with a broad cross-section of clients since our launch on October 1 and thought it worthwhile to relay some of the feedback. There is broad agreement with our Underweight rating on the core Autos sector, driven largely by affordability concerns in the US which led us to forecast a 1.0-million-unit decline in US volumes. The Auto sector has historically underperformed 70% of the time during peak-to-trend phases.
As part of our refreshed view on the sector, we are upgrading KMX to Peer Perform and both rolling and raising our Fair Value to year-end 19 of $75 (was CY 18 of $67). Our fair value uses KMX’s current NTM 15.5x P/E our 2020 EPS estimate of $4.87.
Our analysis of vehicle affordability and price elasticity suggest that the U.S. market could face a 1- million-unit decline, even without a recession. Partly due to changes in China government policy, this market may no longer be as consistent a source of growth and profitability. Europe faces significant regulatory challenges.
KMX reported Q1 2018 pre-market. Used unit comps of ‑2.3% were above Cons. of -4.5% and our -5.0% but met the scrape bar. Adj. EPS of $1.33 beat Cons. of $1.24 and our $1.16. Shares are +13%. With unit comps known, we’re a bit surprised by the move, but improvements in comps (despite rate increase), Wholesale, CAF, and SG&A likely drove EPS revisions (our estimates increased by 14%).
We undertook the unenviable task of reading the proxy for every company under coverage (and one we don’t cover: TSLA).
Using Return on Invested Capital as a lens, we take a look at which companies and sub-industries capture the highest returns within the automotive value chain. We calculate ROIC across 27 companies within industries including dealers, OEMs, parts suppliers, aftermarket retailers, and service providers.
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