Over the past 3 months, KAR is -18% versus CPRT (-3%), Business Service peers (-10%) and the S&P 500 (-11%). We think this is a name worth revisiting given visibility into near-term growth, strong returns with limited cyclicality, two new growth streams (TradeRev and Int’l), and a looming catalyst for valuation, which while delayed, is not far away (spin-off).
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Once a quarter, we comb through corporate filings and summarize the most noteworthy datapoints. At a high level, developments during the quarter reinforced our view that investors should be Underweight Autos and Auto Parts, Underweight Dealers, and Overweight a relatively small selection of companies that fall into the Auto 2.0 category. In our view the U.S. Auto Cycle is in its 8th or 9th inning, with looming pressures on vehicle affordability. China is experiencing its first real Auto Industry downturn, and we are not convinced that the Central Government will step in to specifically prop up Autos. Europe also faces a number of challenges: These include potential trade risks (7% of Europe produced vehicles are exported to the U.S.), political risks (Brexit), and regulatory risks (vehicles more expensive to produce, at the same time that pricing has become more challenged).
KAR reported Q3 on 11/6 with call today (11/08/18). Total rev of $934m beat cons. of $910m but missed our $940m. Adj. EBITDA of $216m missed cons. $223m and our $228m. KAR implied Q4 guide also missed Cons.
KAR reported Q3 2018 results post-close (11/6/18). Total revenue of $934m exceeded cons. of $910m but was below our $940m. Adj. EBITDA of $216m missed cons. $223m and our $228m. KAR EBITDA missed on both ADESA and IAA but met on AFC. Adj. EPS of $0.70 was in-line with cons. of $0.70 and below our $0.76.
We’ve met with a broad cross-section of clients since our launch on October 1 and thought it worthwhile to relay some of the feedback. There is broad agreement with our Underweight rating on the core Autos sector, driven largely by affordability concerns in the US which led us to forecast a 1.0-million-unit decline in US volumes. The Auto sector has historically underperformed 70% of the time during peak-to-trend phases.
We are increasing estimates and rolling our SOTP derived price target to a year-end 2019 value of $72 offering 20% upside plus a 3% dividend yield. Our price target uses a SOTP derived 11.3x EV/EBITDA multiple on 2020E including 9.5x ADESA, 10.0x AFC (13.9x P/E), and 13.5x for IAA (for comparison CPRT is at 16.0x).
Our analysis of vehicle affordability and price elasticity suggest that the U.S. market could face a 1- million-unit decline, even without a recession. Partly due to changes in China government policy, this market may no longer be as consistent a source of growth and profitability. Europe faces significant regulatory challenges.
KAR reported Q2 2018 results AMC Tues. Total revenue of $957m exceeded cons. of $928m and our $951m. Adj. EBITDA of $242m beat cons. $239m and our $236m. KAR largely beat on IAA and came in a bit light on ADESA given continued losses from acquisitions. Adj. EPS of $0.82 was above cons. of $0.80 and in-line with our $0.82.
KAR reported Q2 2018 results post-close. Total revenue of $957m exceeded cons. of $928m and our $951m. Adj. EBITDA of $242m beat cons. $239m and our $236m. KAR largely beat on IAA and came in a bit light on ADESA given continued losses from acquisitions. Adj. EPS of $0.82 was above cons. of $0.80 and in-line with our $0.82.
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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