We undertook the unenviable task of reading the proxy for every company under coverage (and one we don’t cover: TSLA).
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Tues. (5/8/2018) PM, KAR reported Q1 18 (Wed. AM call). Total Rev. of $951m exceeded Cons. of $923m and our $927m. Adj. EBITDA of $229m was in-line with Cons. but below our $231m. A 5% decline in ADESA EBITDA (on SG&A) was unexpected. Adj. EPS of $0.82 was above Cons. of $0.76/our $0.79 but tax helped $0.03. Shares were -1% vs S&P 500 of +1%.
On Tuesday (3/27/2018) we hosted a lunch with KAR’s CFO, Eric Loughmiller, and its VP of IR, Mike Eliason, at Wolfe HQ in New York. For those who couldn’t attend, we add our perspective after a day with mgt.
We are hosting KAR management in NYC on Tuesday, and expect the team to remain visible given increased investor interest from the IAA spin-off. We put together a package of: questions for mgt, printable model, 1 pg. tear sheet, financial profile, SOTP, and annual scenario model.
KAR announced its intention to separate its IAA via a tax-free spin-off within the next 12 months. Specifics on timing of the spin and the final structure of the two businesses have yet to be decided. Rationale for the transaction includes: improved focus and alignment, independent control over strategy and capital allocation, and simplified financial reporting.
Earlier this morning (02/21/18), KAR reported Q4 17 results. Total Revenue of $890m was in-line with consensus of $889m and our $891m. Adj. EPS of $0.63 was above consensus of $0.53 and our $0.60. Adj. EBITDA of $195m just missed consensus of $196m and further missed our $204m. KAR announced a 2018 guidance range for adj. EBITDA of $895m - $925m (vs. consensus/our $909m/$912m) and adj. EPS of $2.89 - $3.04 (vs. consensus/our $2.75/$3.18). Shares were down ~3%.
Most of you cover 50 – 200 stocks and therefore don’t have the liberty of being as into the weeds on every name – that’s our job. To help you do yours, we have created a comprehensive, but chart-heavy, guide to our coverage that is meant to have shelf life and that can be referred back to when you are ready to dig more into our coverage.
In our first tax reform note we studied numerous angles on tax reform. As a continuation, we are studying additional angles and also adjusting numbers and price targets (Exhibit 1). While we remain concerned of the long-term risk/reward of tax reform, near-term we expect consensus EPS revisions to occur as the rewards are easier to forecast than the risks.
Earlier this morning (1/2/18), Mike Kiernan, Wolfe’s Director of Research, sent around the Wolverine update for the firm’s top fundamental picks for the next 6-12 months (see his email below). Always a believer in marrying the fundamentals with the technicals, I thought it would be helpful to provide the charts for each. While a few have some work to do, there are plenty of constructive setups on both the long and short side.
We expect organic volumes to accelerate given 1) integration of recently lapped acquisitions 2) rising off-lease supply (est. 80% market share), 3) ADESA is also receiving a boost to volume from an indirect GM account win as a result of GM’s Retail and lease subvention strategy. 4) KAR’s recent TradeRev acquisition can expand KAR’s TAM by addressing the Dealer to Dealer channel and provide upside to estimates as Consensus has likely not factored this deal into estimates. We believe secular growth drivers remain intact at IAA supporting continue volume growth with potential for RPU growth from younger vehicle mix.
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