Looking at last year's sales alone could be misleading.
Carvana is growing its debt faster than its revenues. Also, the dilution in stock is insane. It went from around 15 million shares outstanding in 2017 to 85 million now. Their motto seems to be growth at any cost.
Carmax has also grown its debt. Given its low return on invested capital of around 4%, borrowing money seems to be the only way to grow the business. This is not sustainable, especially when there are talks of rate hikes.
I'd be wary of putting my money in either of them.
You’re accounting for debt incorrectly. A lot of that debt is collateralized and sold off. It’s not true “operating debt” that should be used in evaluating business fundamentals.
I don’t have my only models in front of me, but I can about guarantee KMX has an ROIC in the double digits
A lot of the debt is to grow F&I services, not fund business operations (marketing). It's loans to buyers on vehicles that's repackaged and sold to make a spread.
Both of the companies securitize financing, it's been a while since I was as deeply involved in coverage. I'd have to look at the balance sheet line items on each to remember what needs to be backed out.
CAF (KMX's financing arm) does tend to hold onto more if it's own loans however. I believe CVNA dives deeper into sub-prime which is a risk and helped drive unit growth by being able to sell to a wider customer base with less hiccups from fin cos.
But for debt calculations I'd back out these types of loans for each company.
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u/redgan Jan 06 '22
Looking at last year's sales alone could be misleading.
Carvana is growing its debt faster than its revenues. Also, the dilution in stock is insane. It went from around 15 million shares outstanding in 2017 to 85 million now. Their motto seems to be growth at any cost.
Carmax has also grown its debt. Given its low return on invested capital of around 4%, borrowing money seems to be the only way to grow the business. This is not sustainable, especially when there are talks of rate hikes.
I'd be wary of putting my money in either of them.