KAR reported Q3 on 11/5 with a call on 11/6. KAR beat on revenue but missed significantly on EBITDA and lowered the full-year guide. However, KAR only modestly lowered the implied Q4 guide, which now looks very ambitious given there’s no clear visibility to a Q4 inflection. We cut est. 9% and cut/roll our PT to $26 for CY ‘20 (was $33 in ‘19). Shares were -18%.
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KAR lowered its annual guide, which is now 2% below prior Consensus at the mid-point but still implies 20% EBITDA growth in Q4!!! Even consensus was skeptical of the Q2 guide, and skeptism on this guide will be significantly greater. Unlike last quarter, it will take more than a series of one-off earnings bridges to calm the markets after stating: “volume and margin pressure drove results weaker than we anticipated”. This sentence is likely to cause another blow up.
Two weeks ago, we assumed broader coverage of Hardlines and Internet Retail and issued four deep dive reports including a downgrade of LOW to Peer Perform and reiterated HD, BBY, and W at Outperform. We also assumed coverage of AMZN, ULTA, WSM, RH, TSCO, and SHW (see our 1-page tear sheets here). Finally, we utilized the broader coverage as an opportunity to reposition our legacy auto part retail coverage and downgrade AAP to Underperform and upgraded ORLY to Outperform.
Today (10/07/19) we are assuming broader coverage of hardlines and internet retail with deep-dive reports on four companies, including a LOW downgrade to PP. We also have two ratings changes from our existing retail coverage (AAP to UP and ORLY to OP), and assuming coverage of six additional retail names with concise 1-page investment tear sheets.
Lyft: Good performance with the trees, but what about the forest?
Performance is Q2 was quite good, as a focus on better pricing and share gains for business travelers and other “high-value” routes led to better-than-expected margins. But we believe that growth in these segments is finite. Enough revenue growth to get to breakeven (from -25% EBITDA margin currently) will require Lyft to tap into the broader market, in our view. And, for that, pricing needs to go down, not up.
Takeaways from Continental earnings call
Continental is a bellwether. In our view, anyone following US suppliers should take a closer look at what they said (which we summarized in this Daily). Conti’s auto business experienced similar 1st half margin compression as suppliers we cover but they are not expecting a similar recovery in the 2nd half.
KAR reported Q2 on 8/6 with a call on 8/7. KAR beat on revenue but missed significantly on EBITDA. However, one-off items helped to explain much of the weakness. While results were disappointing relative to the high expectations set into the spin, we did take some solace in strong underlying EBITDA growth. If KAR hits 2H numbers and proves these were isolated issues, then we see considerable room to run given valuation/growth profile. We cut est. slightly but raise our CY 19 price target to $33 (was $31) on higher than expected cash post-spin. Shares -6%.
What good would a KAR quarter be without controversy? Unfortunately, this quarter was no exception. Total Rev beat Consensus by 4% and Wolfe by 3%. Total volume was in-line with our estimates with much of the difference driven by purchase accounting. Adj. EBITDA missed Cons by 8% and Wolfe by 9%. A non-recurring inventory loss at a subsidiary explains 4pts of the EBTIDA miss. Call tomorrow (08/07/19) at 11AM.
We re-initaited on KAR shares with a $31 PT. We see the combination of DD FCF Yield, 4-5% dividend yield, 6-9% organic growth algorithm, and 5pt margin opportunity (20% upside) as a compelling opportunity at 8.4x EBITDA (7.6x ex-Trade Rev). Importantly, if we are right, and KAR achieves these growth targets, grows Trade Rev, and disproves online bears, we think KAR shares could see an additional 20% upside on multiple expansion. See full report here. See our bullish IAA report too.
Does Tenneco have strategic options?
The Auto Industry Outlook has deteriorated since Tenneco’s current strategy was unveiled in the Spring of 2018. And while it may be difficult for the Company to change direction, we believe that this needs to be considered. The current plan does not look like it will work. But we believe that TEN may have options that the Street is not actively contemplating.
Why are OEM’s adding EV’s into the lowest-priced vehicle segments?
FCA’s $788mln investment for a Fiat 500 EV production line is another data point that highlights the economic challenges of Europe CO2 regulations. But more fundamentally, why do OEMs think consumers are going to pay a €10k-€12k premium for car types that typically cost €20k or less?
Tire update… Natural Rubber continues to decline; And Q2 replacement demand was decent (despite a pullback in June)
Overall, industry trends suggest CTB is increasingly well positioned.
We are re-initiating on stand-alone KAR with a $31 CY 19 Price Target. We see undemanding valuation at 8.4x NTM EBITDA or 7.6x (ex- Trade Rev) with a 9.5% FCF yield offering good risk reward for a stock with 6-9% targeted organic growth with additional upside from a 5pts of margin expansion (20% to ADESA segment EBITDA growth). We see downside as protected due to the threat of an LBO.
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