August 21st, 2015 Analyst: redcards

LONG | CarMax, Inc. | NYSE: KMX

Basic Data Scenario Analysis

Price (8/21/15) $59.58 Bear Case Base Case Bull Case
3-Month Avg. Vol. 1,460,080 Free cash flow ($mm) 958.5 1,016.6 1,032.1
Market Cap $13.2b FCF per share $4.59 $5.75 $6.26
Enterprise Value $16.3b P/FCF multiple 12.0x 15.0x 17.5x
Share price $55.08 $86.20 $109.55
Upside/downside -7.6% 44.7% 83.9%
Capital Structure Considerations Projected 2017 es ti ma tes

$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.

Key Sensitivities Scenario Details

Effect on Spread Capture Bondholder Payout Bear Case Base Case Bull Case
0.1% 1.1% 2.1% 3.1% 4.1%
Capex ($mm) -58.1 -38.7 -15.5
5.2% 5.1% 4.1% 3.1% 2.1% 1.1%
6.2% 6.1% 5.1% 4.1% 3.1% 2.1% Shares outstanding (mm) 208.8 176.9 165.0
Auto Loan
7.2% 7.1% 6.1% 5.1% 4.1% 3.1% FCF yield 7.7% 9.6% 10.5%
Interest Rate
8.2% 8.1% 7.1% 6.1% 5.1% 4.1% IRR -1.6% 7.7% 13.0%
9.2% 9.1% 8.1% 7.1% 6.1% 5.1% Projected 2017 es ti mates

Effect on Used Gross Profit per Unit Vehicle Unit Growth

8.5% 9.5% 10.5% 11.5% 12.5%
10.0% 2,193.2 2,173.1 2,153.5 2,134.1 2,115.2 Catalysts
11.0% 2,233.2 2,212.8 2,192.8 2,173.1 2,153.8
Gross Profit
12.0% 2,273.6 2,252.9 2,234.2 2,212.5 2,192.8
Growth Continuation of share repurchase program beyond
13.0% 2,314.4 2,293.3 2,272.5 2,252.1 2,232.1
14.0% 2,355.6 2,334.0 2,312.9 2,292.2 2,271.8
2016P.
Continued outperformance of ABS vs. subprime
competitors.
Key Risks and Mitigants
Subprime financing test exposes KMX to bad credit: Subprime auto loans are financed with the Company’s balance sheet and do not
threaten securitization performance. Subprime loans make up 1.3% of total receivable balance.
Cash flow from auto loans is not immediate upon issuance: There is a 1.5-month gap between loan overcollateralization target being filled
and net cash flows received on new auto loans – KMX does not book these cash flows until they are received.
Financing origination is sensitive to interest rate environment: Attractive bank financing rates on securitizations combined with increasing
interest rates allows spread capture to remain constant at 5%.

Financials

Analyst Estimates Consensus

($ in millions) 2013 2014 2015 2016E 2017P 2016E 2017P
Revenues 10,962.8 12,574.3 14,268.7 15,746.7 17,307.1 15,569.7 17,175.2
Gros s margi n 13.4% 13.1% 13.2% 13.6% 13.6% 13.4% 13.5%
Net i ncome 434.3 492.6 597.4 669.5 725.3 639.2 689.2
Profi t margi n 4.0% 3.9% 4.2% 4.3% 4.2% 4.1% 4.0%
Earni ngs per s hare $1.87 $2.16 $2.73 $3.78 $4.04 $3.07 $3.47

1
August 21st, 2015 Analyst: redcards

Why Does This Opportunity Exist?

Financial databases miss KMX’s cash generation: Cash flow from securitization transactions are recorded as financing cash flow, and is not
included in CFO/FCF calculations on automated financial terminals such as Bloomberg, Capital IQ, and FactSet.
Auto securitization performance is buried in the weeds: The low risk performance details of auto loan securitizations are buried within the
fine print of KMX’s complex securitization prospectuses that many investors simply do not take the time to read.
Market sell-off: KMX is currently trading 15% down from its 52-week high of $73.70 after an analyst comps estimate miss for Q1 earnings
prompted an irrational sell-off.

Debunking the Bear Thesis

Cash flow from securitization issuance is unsustainable: Net cash flow from securitizations is collected up front at the time of transaction
with special purpose entity, and is not tied to cash flow from spread capture.
Time-to-maturity of loans is too long to wait for cash flows: The tiered payout structure of KMX’s auto securitizations results in the 50%
payback of a $1.2b loan with a 5.5-year time-to-maturity within the first 24 months.
Subprime financing test adds too much risk to balance sheet: KMX gets first look at customer profiles for financing, and can still refer risky
subprime customers to bank partners if the risk of loan default is too high for on-balance sheet financing.

KMX Would Be a Short If…

CarMax Auto Finance (CAF) was spun off: KMX would lose a strong source of cash flow and revert to lower margin gain on fees from financing
referrals to third party banks as well as if the Company abandoned self-financing completely.
Auto loan spread capture fell below 3%: Loan performance would fall in-line with new car loans and no longer present an attractive return
profile compared to the same best-in-class auto loans of Ford and Toyota.
Auto loan securitizations began capitalizing with subprime credit: KMX’s auto loan securitizations would no longer have a competitive edge
in the ABS market if they were capitalized with subprime credit and would lose their asymmetric risk/reward profile.

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%
2
September 29, 2016

SHORT | Blackberry Ltd. | TSX: BB / NASDAQ: BBRY

Basic Data: Price (9/29/16): $7.94 | 3-Month Avg. Vol: 1,160,158 | Market Cap: $4.2bn | Enterprise Value: $3.2bn
Company overview
Global mobile communications company which develops hardware and software solutions for use on multiple wireless networks
The Company’s solutions provide access to information including e-mail, voice, instant messaging, short message services, the Internet, and
intranet-based applications and browsing
Its technology also enables third party developers and manufacturers to enhance their products and services through software development
kits, wireless connectivity to data, and other third-party support programs
Investment Thesis
Basis of thesis: Growth outlook / Margin compression
Once an industry leader in the mobile communications sector, BBRY has been experiencing (in recent years) dislocation in its operations due
to major challenges in the business and structural changes throughout the broader industry
Hardware revenues have seen 8 consecutive quarters of sequential revenue & unit declines, and continue to disappoint. While segment
gross margins have recently improved, operating margins remain negative despite inventory write-downs and recent cost cutting measures
− Segment unit sales peaked in FY11 at 54mm. Following a YTD run rate of 1.6mm (vs. FY16 target of 10mm units), CEO John Chen has
decided to fully discontinue developing smartphone hardware and transition to a software/security software and brand licensing program
− BBRY will develop and license security features and software for 3rd party devices and receive per device royalties, resulting in reduced
working capital requirements (e.g. inventory should drop to zero) and opex of ~$100mm (through lower purchase commitments/inventory)
− While working capital and opex will benefit from the hardware exit, incremental revenues from the segment will essentially drop to zero
in the near-medium tem. Furthermore, BBRY has historically gone to market with it’s associated mobile management software on its
own BB7/BB10s, and unintended consequences for the hardware exit have not been priced in for the enterprise software business
− In addition, the brand & software licensing deal in Indonesia (and potentially in India and China) do not seem to suggest broad-based
adoption/monetization, with only 150k BBRY units shipped in the last 4 quarters, with a clearly declining trajectory
Software & Services, long considered BBRY’s ‘growth’ segment, has also missed revenue projections and declined sequentially. Despite
maintaining FY17 management guidance (of 30% yoy growth), this still implies a meaningful deceleration in growth through 2H17
− While acquisition of Good Technologies contributed $74mm of new revenue (with potential headwind of $75mm yet to be recognized), the
continued deceleration of quarterly new customer adds suggests that 1) Good Technologies/BBRY integration is causing a slowdown in
orders, 2) conversion to next-gen Software licenses is diminishing, and 3) prior acquisitions have already started to overlap
− While 81% of software revenue is now recurring (vs. 74% in 2Q16), gross and operating margins remain challenged due to declining
patent licensing revenues (zero in certain quarters), and the shift to recurring enterprise software (vs. prior perpetual license sales)
Service Access Fees (“SAF”) revenue improved this quarter, however Management has guided revenues to decline 20% qoq next quarter
as BBRY shifts away from device sales (with SAF revenues expected to accelerate towards zero)
− Phasing of SAF revenues will affect BBRY’s profitability given the segments 75% operating margin (vs. 20% OM in software segment)
Despite headline opex reductions (assuming no GP loss), several factors suggest continued downward pressure on BBRY shares in the near
term: 1) Major projected revenue declines in SAF and hardware (which far outweigh the revenue growth from the Software & Services
segment), 2) continued operating losses, and 3) four consecutive quarters of negative FCF (with a 5th negative quarter projected)
Key concerns also continue to surround Company management. CFO James Yersh has just announced that he will be leaving the company
“for personal reasons”. And despite being with the company for almost 3 years, CEO John Chen does not seem to have a clear handle on
the business, as evidenced in many instances over the years, most recently through FY16 budget for hardware handset unit sales
Key Risks and Mitigants
Major cost reductions. While significant write-downs (>$800mm 2016 YTD) have positively affected cost structure, these have become a
recurring theme, and the artificially inflated gross margins and EPS is unsustainable. BBRY has also been taking Resource Alignment
Program restructuring charges for over a year and no clear opportunities appear to exist for further cost reductions in the near-medium term
Why Does This Opportunity Exist?
While the Street has priced in sale of hardware segment (and cost savings of ~$100mm in opex), the bullish outlook on Software & Services
seems to be overdone, especially given that the ‘growth’ segment is in itself seeing a decelerating topline
Short interest recently dropped to the lowest level since April 2012 (stabilizing at ~10.5% of shares o/s). With BBRY falling ~15% YTD, a
reemergence of short sellers could easily send the stock to new lows, and early positioning offers a clear opportunity to benefit
Valuation
Given BBRY’s segments are moving in diverse directions, a SOTP analysis was chosen as the primary valuation methodology . Price / Sales
was used as reference multiple, with valuations incorporating discounts to peer trading multiples due to uncertain outlook of BBRY segments

Confidential

0
 September 29, 2016

Appendix

Valuation Comparables

Price / Earnings Price / Sales EV / Sales Gross Margins

Company Price Market Cap EV CY16E CY17E CY16E CY17E CY16E CY17E CY16E CY17E
BBRY BlackBerry Limited $7.94 $4.2 $3.2 NM NM 2.4x 2.1x 1.9x 2.1x 51.0% 52.5%

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%

Software Security Valuation Comparables

Price / Earnings Price / Sales EV / Sales

Company Price Market Cap EV CY16E CY17E CY16E CY17E CY16E CY17E
BBRY BlackBerry Limited $7.94 $4.2 $3.2 NM NM 2.4x 2.1x 1.9x 2.1x

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