Transcript: Benzinga: Discussing FedEx and CarMax Earnings
Interview Transcript
Interviewer - Benzinga
Typically, we get you executives from publicly traded companies like the awesome interview you just saw to talk about all things AI. Now we're gonna get you an idea and some perspective of someone who is invested in a couple of companies coming up with me right now is going to be Chris Ballard, who is the Managing Director at Check Capital Management. So let's go and bring on my man, Chris, so we can talk some stocks.
In terms of CarMax and FedEx, both companies reporting here soon, you've got FedEx that's reporting, I believe later on today and you've got CarMax and I think reports on April 11th. Chris, pleasure to have you on the show.
Chris Ballard
Hey, thanks for having me. I'd be excited to talk about some March Madness. Tip-offs in about an hour too, right?
Interviewer - Benzinga
I'll tell you what, we'll make this very quick and you know what you got me. I lied about my power. It's actually cause I want to watch March Madness.
It's not really not, but let's get let's get right to it, man.
When it comes to FedEx, the number one that I think that I think personally is reliability because whenever I very few times is it where I don't get my FedEx packages. But what are you kind of expecting in terms of earnings from them right? I think consensus is about 3.49 cents per share. You're looking at also revenue about 22 billion.
What are you hoping to get out of these earnings?
Chris Ballard
We're long-term shareholders, we're always looking at the long term. We've owned FedEx basically since 2015 and added to it over time here.
They're going through a process now of consolidating companies and they started this a little over a year ago. It's a real heavy lift for them and it's been an exciting turnaround that we've been keeping a close eye on.
They're basically looking to cut costs permanently. About $1.8 billion of cost, and then also make other adjustments along the way with costs at the corporate level as well as make some adjustments where they kind of had over-expanded right before the pandemic.
And so they're kind of pulling back on that and quarter over quarter over the last, you know, four quarters in a row, they've shown that they have indeed been executing on this plan very well.
We're excited to see what we have been seeing. So basically the margins have been growing fairly significantly and we expect to see more of the same on this call.
We're excited to see what Raj has to say about it today.
We think basically the needles moving in the right direction and if they're able to execute on this plan, it's actually going to be very accretive to shareholders and they're very undervalued at this point. And if they kind of don't completely execute on it the way that they should over a period of time, they're still at a very good valuation at this point. So that's what we'll be looking at today.
Interviewer - Benzinga
Are you taking a little bit step further away from the earnings call?
Are you at all concerned with Amazon not just taking away the dollars that they give FedEx in terms of, you know, being a customer and having FedEx as a vendor, but also Amazon saying you know what, hold on a second, we already have a great logistics system. We're going to compete as a FedEx or UPS.
Are you concerned about that at all?
Chris Ballard
We have to keep an eye on it. We're really not concerned about it. There are fundamentally and materially like structurally different types of businesses.
FedEx delivers to 200 countries around the world and they're going to deliver to, you know, for businesses like, if you're going to buy something at Walmart or Target or Dick's Sporting Goods, you're not going to, you're not going to go to Amazon for this. You're going to go to FedEx.
So they're in different arenas.
They basically were working together up until maybe a handful of years ago, and it was Fedex's decision to break up with Amazon. There wasn't, you know, the profit margins weren't there for them.
Amazon had some demands. So Amazon's packages that are basically delivering as much as a little more than FedEx at this point in time.
But they're basically doing it to their own consumer base. And as Amazon of course grows and delivers to their consumer base, it's going to be good for them. But FedEx has, you know, structurally again different business across the board, it's a duopoly, really with UPS.
Where they're doing completely different things, so you know we're not concerned, but of course we're very aware of Amazon's growth and that and we want to be aware of how that could affect things in the long term, but Amazon's not delivering to 200 countries around the world.
So it's quite a bit different.
Interviewer - Benzinga
You know, I'm going to make a phone call to Raj because I'm always curious about how in the world is it that a package that is just dropped off in Atlanta, GA at 3:00 PM has now ended up in Seattle by 7:00 AM the next morning.
Like, let me let me just kind of be a package in a very safe way so I can breathe. So you know it, it's just fascinating to me.
So on that extent, last question on this and we'll move on to CarMax.
Chris Ballard
Sure.
Interviewer - Benzinga
Are you worried about global tension? Not in terms of like trades and you know the business economic aspects of it having an impact on FedEx in terms of its growth.
Chris Ballard
Sure. I mean, that's actually been that's been an effect over the past couple of years as a matter of fact.
Interviewer - Benzinga
Yeah.
Chris Ballard
It's always something that we need to be aware of and thinking about, you know, they're delivering something to the tune of 16 and a half million packages a day on average, a couple of years ago. And now it's more like 14 1/2 called 15,000,000 packages a day.
We'll see where it comes out today.
So, it has declined and that is because of some you know you can call it global tensions, but it also has to do with the pandemic and just yeah.
Me being rather tempted worldwide. So yeah, we need to keep an eye on all this, but people are always gonna need their packages.
You're gonna have an idea about what you want. And FedEx is going to be the go to for that. But so, you know, people aren't going to stop basically getting packages and importing and exporting them, but it does have an effect and it has had an effect.
We're actually on the we're swinging back at this point in time anyway.
Interviewer - Benzinga
Alright, love that.
Let's go and talk about CarMax now. I believe, like I said, they go ahead and report on April 11th. They do the consensus there.
You have about $0.45 per share. You also got the revenue of approximately 6 billion is what's expected now CarMax.
I always love talking to companies where I use them or people that are invested in the companies where I use their products.
When I when I first thought of CarMax, right when they obviously years ago, when they started up and marketing, I was always like man who in their right mind would pay an additional $1000 or whatever the margins might be an increase compared to going to a dealership and haggling.
Low and behold pie on my face because four months ago I purchased a car from CarMax because I didn't want to deal with it. I didn't want to deal with the back and forth of negotiating. I knew what I liked. I knew what I could go and afford on a monthly payment and I got myself a car. So.
How valuable is it to kind of have that experience?
But more so you've also got a competitor in Carvana that you know has been doing well, at least stock price, business-wise is a question.
So to wrap all that information up, are you worried about competition from Carvana taking market share from CarMax or any other competitors that may come up?
Chris Ballard
We're always paying attention to all of this. The word worry is, you know, when you when you're looking to get into a business like this, you want to kind of check all the boxes.
We have a checklist we have when we're getting into any individual business. Yeah, CarMax like you mentioned, they they're basically, you know, differentiated offer in a highly fragmented market. And they really have a superior process that's out there.
They are the ones that changed the market for used car sales, right?
There's like 40 million cars sold, used cars sold a year. They're selling about 2 million of those.
If you were to break it down at about 4% of the market share right now, they're looking to grow back to 5% of the market share relatively quickly. And you know, with a highly fragmented market, you can take market share from the smaller mom and pop and regional used car dealers. And if you have the superior process which what you just described.
Personally, I actually bought my truck from CarMax as well a couple of years ago.
Interviewer - Benzinga
Did you flex on them, he they flex on them and say hey, listen investor, I need to discount.
Chris Ballard
Yea to be honest with you,I wish.
I kind of I keep that my mouth shut on that one, but maybe I should have.
Interviewer - Benzinga
Yeah. Yeah, like a phone call.
Chris Ballard
I know, I know, but so you know when it comes to CarMax, they definitely have a great process in general. They're selling I think they're about less a little less than 1% of the market share and they just went through a scary time themselves actually.
But they've made their way all the way back and used car industry relatively recently, gone through a depression, the numbers were somewhat similar to where they were in 2008, 2009 and to some degree even worse in instances.
And so at this point in time that there's really a tail wind coming back and they're just kind of we're hoping they're gonna grow back to where they were and above and beyond where they're normalized earnings were even just a few years ago.
But so, you know, we always keep an eye on the competition if that's basically part of the question, but they're looking to open five stores this year.
They used to have a demand where they try to open sort of as many stores as they could.
They're looking to double their footprint maybe 10 years ago. They've done most of that, but now that consumers are buying online, of course, they don't have to open as many stores to sell the vehicles, they're going to sell and the profit margins are a little higher. They actually did about 15% of all their sales last year were completely online. And 55% of them were done partially online like you would go and get approved for your loan and then you wanna go get it done in person. So you know Carvana doesn’t really offer the in person at all. So Carmax has a little bit of both at this point in time but they are head and shoulders above Carvana at this point in time we’ve gotta keep an eye on that.
But there's definitely room to run. I mean, we're talking 1% market share for Carvana 5% market share ish for CarMax.
They both have a long way to run in an industry that people are looking for what you’re looking for. They want to get away from this haggle pricing and they're doing a really good job at doing that.
Interviewer - Benzinga
You know, from a consumer standpoint, it was a bit annoying, about what I am about to talk about but from a business standpoint, it's great. But also consumer, it's kind of great. What I'm saying is if I, so I look, I bought a Kia right about a Kia and I want a specific color with a specific interior and a specific speaker system.
Because I like to be bougie with some things, but if Atlanta didn't have it, you know, North Carolina may have had it.
Which is great. I would just have to pay 200 bucks to get it here if I didn't like the car, guess what? I don’t get the 200 bucks back.
From a business standpoint, that's amazing. For a consumer standpoint, it's still great to be able to bring in vehicles from around the nation. Yeah, so go ahead and make sure, hey, is this good? Is it something I want? Because one thing with Carvana, I was like, hey, can I get a test drive? They're like, no, it's like a vending machine. You don't you don't get a test drive. You can return it in three days.
And I'm like, yeah, but that's that's a lot of money for me to worry about going the back and forth. So I get that aspect.
Chris Ballard
Yeah. CarMax has a 30-day guarantee. I mean you have a long time to sit on that vehicle, drive it around and bring it back if you want to.
Interviewer - Benzinga
Yeah, let's talk about what innovation we can expect and I'll ask you a general question after that.
We’re 5% with CarMax, what would you like to see if you could just talk to the executives and say, hey, I want AB and C, one or two things from the innovation side for CarMax to go from 5% to 7%, what would you want to see?
Chris Ballard
You know, we think that they're doing a great job as it is as far as innovation goes, we think they should just continue to do what they've been doing.
We're value investors. And so we like consistency. We like to have a good understanding for what's going on. We don't think they need to do much more in the way of innovation.
But we think they should lean into the online sales a little bit more as time goes on and as the consumer ends up becoming more comfortable with that as time goes on as they are right now and that's gonna happen sort of naturally.
So they just need to keep doing what they do best and eventually we're going to get to that 6 and 7%.
As far as brand new innovations, I wouldn't speak to that too much at this point in time. We think they're in a great position and they're executing very well and they should just continue to do so and the sort of the wins that they're back right now.
Interviewer - Benzinga
And it definitely looks like the warranty aspect of it. We haven't talked about. That's another way where you kind of get built into the margins of folks that purchase the warranty.
I think it's a great package, but of course there's reason they sell warranties is because it's a profitable high-margin aspect of it as well. So that's another business.
Let's kind of zoom out.
Chris Ballard
They also they also have the Curtis model as well. And then they also do lending also.
So the lending aspect of things, the margins have been squeezed as of late. That has a lot to do with interest rates.
Interviewer - Benzinga
Yes. Yeah.
Chris Ballard
So now is like the Fed.
Interviewer - Benzinga
Are you worried about that in terms of like, hey, could get worse or do you think?
OK, the worst is already built in it only gets better if anything.
Chris Ballard
It feels like the worst is built in. We don't know when that will come to an end, but the feds just yesterday commented on, you know, cutting rates likely 3 times this year.
So that's going to help them as far as their margins go on that front. They also have loan loss provisions where over the last couple of years they've raised them preparing for people to default on their loans.
We think that's probably the the worst of it's kind of behind them on that, but they do a very good job at setting aside what they expect to have and losses on that front. So it does feel like the bottom ish is kind of set in a little bit on the on the lending side of things for them.
Interviewer - Benzinga
Awesome. Appreciate you so much for hopping on man. I really do appreciate your insights. I look forward to more of these conversations as we get back into earning seasons here in about a month or so.
Chris Ballard
That sounds good, Z. Thank you for having me on.
Interviewer - Benzinga
Absolutely talk soon. That was Chris Ballard, who is the Managing Director at Check Capital Management.