dimanche 22 novembre 2015

Carmax (KMX) or Lithia Motors (LAD)?

A commentator on a recent text suggested to me to take a look at Lithia Motors (LAD), a company similar to Carmax. I've looked at it and it seemed to me like a very interresting investment. In fact, it's probably one of the most interesting companies right now on the stock market in my opinion because of the valuation VS growth. However, the sector may be a little too much related to the general state of the economy.

And even if Lithia Motors looks pretty good, I have to say that Carmax looks interesting too. The stock was recently at an annual low, altogether with many other stocks. It's often a good time to shoot when many companies are down at the same time. It means that your target probably hasn't internal problems.

Here's how I work to analyze a company which seems interesting. In this case, I was able to compare two similar companies with the same metrics. I think we always can compare any two companies, whatever the sector in which they operate. But when the comparison is between two companies in the same sector, it's even easier to make a choice. 

Actual PE ratio: 18
Lowest / Highest PE ratio last 5 years: 17 / 25
Performance last 5 years: 64%
Performance last 10 years: 281%
LT debt / annual profits: 15,6 times (pretty high)
Number of shares last 5 years: small buyback
Annual EPS growth last 5 years: 17%
Actual ROE: 19
ROE last 5 years: 17
Dividend: None

Lithia Motors:
Actual PE ratio: 17
Lowest / highest PE ratio last 5 years: 12 / 28 
Performance last 5 years: 792%
Performance last 10 years: 310%
LT debt / annual profits: 13,3 times (pretty high)
Number of shares last 5 years: no buyback, but no dilution either
Annual EPS growth last 5 years: 93%
Actual ROE: 25
ROE last 5 years: 18
Dividend: 0,7%

Winner in each category 

Actual PE ratio: LAD
Lowest / highest PE ratio last 5 years: KMX is the closest to the lowest PE ratio of the last 5 years
Performance last 5 years: LAD
Performance last 10 years: LAD
LT debt / annual profits: LAD
Number of shares last 5 years: KMX
Annual EPS growth last 5 years: LAD
Actual ROE: LAD
ROE last 5 years: LAD
Dividend: LAD

Lithia Motors seems to me to be the best investment. The growth is better, the ROE is better, the debt is smaller and the PE ratio is smaller. There's a lot of debt in this industry (probably because they have to buy used cars before selling them). But both companies are very well managed and I think both will do well in the future.

In fact, I may buy both companies pretty soon. But If I do, the biggest investment will be LAD because most of the numbers suggest that this company will continue to do better than KMX. 

9 commentaires:

  1. I'm not familiar with LAD but the reason KMX debt is so high is because of Carmax auto finance.

    Basically, they take debt so that they can lend money to their clients, at the same time they take the spread (around 5%) as a profit

    So this isn't a "real" debt like buying some equipement but more a debt like a bank.

    If you remove that, their LT debt / annual profits is lower that 1.

  2. Glad to see my comment on LAD pique yours curiosity... also note the DeBoer family have the control of the Company via a multi-voting share class category... something uncommon in the US, but more frequent in La Belle Province...

    Sydney DeBoer is still the Executive Chairman at 72 y.o....Hope he will worked until the 90's like Charlie Munger...:-)


    1. I don't know anything about the history of LAD and KMX. Thanks for the details!

  3. I wondering what the chances are that Van Tuyl eventually consolidates Lithia...

    Do you think the relative favor of KMX amongst some investors like Gayner and Akre is due to used cars being less impacted by the cyclicality of the automarket (usually, tho not in 2009)?

    1. Maybe! Some Investors are in for the quality of the business. Some others are there for the quality of management...

      If you look at a chart, you'll see that KMX ride hasn't been that regular in the last years. For predicability, there's surely better stocks.

  4. Oh men!

    Carmax (KMX) was down close to 10% this am following their pre-market earnings release!

    Same store Revenues were flat, even if SS volume were down marginaly...

    Revenues from New Cars were more than 20% down, but remember it was 1.6% of sales last year Qtr VS 1.2% for the current Qtr. Used cars is 82% and wholesale is 15% of the revenues...

    Net earnings decreased slightly while EPS improved also slightly thanks to repurchased shares...

    What to expect going forward? Approximately 10% per year from the Store footprint (13-16 Stores per year for the next several years from the current 155 stores base) + a couple points from share buyback and improvement as soon the Auto manufacturers will reduced their allowances... 12-15% per year for 5-7 years.

    KMX is a Value investor favorite... Sequoia funds, Giverny-François Rochon wrote about it several times in the newspapers, COTE-100 talked about it in their annual conference last month and Odlum-Brown have it in their portfolio...

    For the first time in a while, it is trading close to 15 next year expected EPS...


  5. Perhaps a less 'exciting' way to be in the automotive dominated business is as a landlord REIT. See automotiveproperties.ca, stock symbol apr.un. Worth researching, nearly a 10% yield, 92% payout ratio, and a couple of recent acquisitions in the past two weeks.

    Jay Walker

    1. web address should be automotivepropertiesreit.ca, apologies.