General Motors disclosures should remind investors that GM has an interesting SOTP angle. While the 10K dropped language related to timing of Cruise Commercialization (we still expect this w/in the next 12-months), the company is clearly preparing for bigger things. Cruise employees and management are receiving Stock Options and RSUs that vest upon an IPO. On the negative side, GM also continues to disclose potential residual risks related to the bankruptcy of old GM (Plaintiffs want 30 MM additional shares for the GUC trust; GM will fight this at a March 11 hearing); The Takata recall could cost $1.2 bn (though GM is still seeking to avoid a recall).
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KAR reported Q4 on 2/19 with a call 2/20. Total rev of $929m missed cons. of $936m and our $944m. Adj. EBITDA of $207m beat cons. $205m but was slightly below our $208m. KAR full-year adj. EBITDA guide of $935-$975m was in-line. Shares fell 13% on three key issues.
On 1/8 we observed that KAR shares had gotten too cheap as the market was valuing core ADESA at only 3x ‘19 EBITDA (and all of Remain Co. at 5.5x EBITDA) and the prospects of the forthcoming spin were being ignored. Even if Remain Co. post-spin stays at the current 7x we think there is a strong chance that it becomes an LBO candidate fetching at least 9x ‘20 EBITDA, which should effectively put a floor on KAR valuation.
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).
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.
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