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$300m of long-term debt at 1.6% interest (expiring 11/17) and 0.2x net debt/EBITDA ratio.
Investment Thesis
Sentiment on the subprime auto ABS market is too bearish. The Street ignores the outperformance of KMX’s auto loans benefiting from an
increasing origination rate driven by consensus expectations of modest retail gross profit expansion as store base grows 45%.
KMX’s auto loans offer an asymmetric risk/reward opportunity as auto ABS are not capitalized with subprime credit or the Company’s balance
sheet. ABS credit metrics have best-in-class risk performance of < 2% net losses and 5% spread capture on an average 7% loan.
Management is overtly conservative. Overcollateralization reserves are guided at filling 3-4 months after issuance, but are completed sooner
at 1.5 months, allowing for quicker net cash flow capture of high quality credit and contributes to a 14% ABS cash flow CAGR.
A 9.6% average FCF yield is efficiently allocated by management. $2.25b worth of shares will be reacquired through 2016 under current
buyback plan, and will drive a low-to-mid teens compounding return over the next 5 years.
Financials
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August 21st, 2015 Analyst: redcards
Valuation
I valued KMX on 2017P FCF. A composite of high quality American and Chinese automotive retailers, manufacturers, lenders, and auctioneers trade
at an average 15x FCF. My base case 15x FCF scenario both embeds conservatism and margin of safety into the expected IRR considering KMX
currently trades at 10x 2017P FCF.
Base Case Drivers
KMX Valuation Scenarios CarMax Retail 2015 2017P CAGR
Retail units 590,224.0 720,706.4 10.5%
$120.00 $109.55 Retail average selling price (ASP) 23,585.5 23,803.9 0.5%
Retail gross profit per unit (GPU) 2,840.8 2,993.0 2.6%
$100.00 CarMax Auto Finance (CAF) 2015 2017P CAGR
$86.20 Interest and fee income ($mm) 604.9 852.9 18.7%
$80.00 CAF income ($mm) 367.3 546.0 21.9%
Non-recourse notes payable, net ($mm) 1,222.2 1,742.2 19.4%
$59.58 Auto Loan Securitizations 2015 2017P CAGR
$60.00 $55.08
Average interest rate 7.1% - -
Bondholder payout 2.1% - -
$40.00
Spread captured 5.0% - -
Return on invested capital (ROIC) 29.0% - -
$20.00 Base Case Methodology
FCF Multiple Discounted Cash Flow
$0.00 2017P FCF per share $5.75 WACC 10.0%
Today Base Bull Bear Applied FCF multiple 15.0x Long-term growth 3.0%
Price target $86.20 Enterprise value ($mm) 16,304.2
Ups i de / Downs i de 45% 84% -8% Upside / downside 44.7% Net debt ($mm) 259.8
FCF per s ha re $5.75 $6.26 $4.59 IRR (Present to 2017P) 7.7% Equity value ($mm) 16,044.4
Shares out. (mm) 176.9
FCF mul ti pl e 15.0x 17.5x 12.0x Price target $90.70
IRR 7.7% 13.0% -1.6% Upside / downside 52.2%
Free Cash Flow Yield IRR (Present to 2017P) 8.8%
2016E 2017P 2018P 2019P 2020P
Free cash flow ($mm) 743.2 1,016.6 954.1 1,210.6 1,250.6
Shares outstanding (mm) 208.8 176.9 176.9 176.9 176.9
Free cash flow per share $3.56 $5.75 $5.39 $6.84 $7.07
Free cash flow yield 6.0% 9.6% 9.1% 11.5% 11.9%
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September 29, 2016
Confidential
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September 29, 2016
Appendix
Valuation Comparables
AAPL Apple Inc. $112.18 $605.0 $628.2 13.3x 12.2x 2.8x 2.8x 2.9x 2.8x 39.1% 39.1%
MOBL MobileIron, Inc. $2.72 $0.2 $0.1 NM NM 1.4x 0.8x 0.9x 0.8x 82.4% 82.3%
MSFT Microsoft Corporation $57.40 $448.2 $388.6 20.2x 18.8x 4.8x 4.0x 4.2x 4.0x 64.0% 63.5%
CTXS Citrix Systems, Inc. $84.94 $13.2 $13.2 16.8x 15.5x 3.9x 3.7x 3.9x 3.7x 85.0% 85.0%
NOK Nokia Oyj Sponsored ADR $5.72 $33.0 $26.3 27.2x 17.9x 1.2x 1.0x 1.0x 1.0x 39.1% 39.8%
ERIC LM Ericsson Telefon AB Sponsored ADR Class B $7.10 $21.3 $18.9 13.9x 12.2x 0.8x 0.7x 0.7x 0.7x 33.5% 34.0%
VMW VMware, Inc. Class A $73.08 $31.1 $24.0 17.0x 16.0x 4.4x 3.3x 3.4x 3.3x 87.0% 86.7%
CHKP Check Point Software Technologies Ltd. $76.73 $13.2 $11.8 17.2x 15.9x 7.6x 6.5x 6.9x 6.5x
CTXS Citrix Systems, Inc. $84.94 $13.2 $13.2 16.8x 15.5x 3.9x 3.7x 3.9x 3.7x
FEYE FireEye, Inc. $14.49 $2.5 $2.3 NM NM 3.4x 2.7x 3.1x 2.7x
IMPV Imperva, Inc. $52.72 $1.7 $1.5 NM NM 6.9x 4.9x 5.9x 4.9x
MOBL MobileIron, Inc. $2.72 $0.2 $0.1 NM NM 1.4x 0.8x 0.9x 0.8x
PANW Palo Alto Networks, Inc. $156.08 $14.1 $13.6 73.2x 48.8x 9.0x 6.6x 8.7x 6.6x
PFPT Proofpoint, Inc. $75.26 $3.2 $3.1 836.2x 193.0x 8.7x 6.6x 8.5x 6.6x
SYMC Symantec Corporation $25.01 $15.4 $12.5 22.8x 15.9x 3.9x 2.8x 3.1x 2.8x
Average 5.6x 4.3x
SOTP Valuation
2017E Price / Sales Value
($ in millions) Sales Multiple Per Share
Hardware $379.5 0.5x $0.36 Share count 522.826
Service $331.3 0.1x $0.06
Software $668.1 4.0x $5.11
Total $1,378.9 $5.54
Net Cash $358.0 1.0x $0.68
Equity Value $6.22
Confidential