The Market is bracing for challenges as we transition to 2019, including lower Auto Production (particularly in China and Europe during 1H19), higher Rates (which raise concerns about Mix, Pricing), the strong U.S. Dollar, Regulatory Content, unpredictable Government Policy/Tariffs, the burden of increased Spending on Technology with uncertain returns, and in some cases discontinued passenger car products.
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KMX reported Q3 2018 pre-market. Used unit comps of -1.2% were below Cons. of 0.7% and our 0% but met the scrape bar. Adj. EPS of $1.09 beat Cons. of $1.00 and our $1.01 as Wholesale, CAF, tax, buybacks and SBC made up for a short fall in unit sales. Shares are +4% vs. -1% tape.
KMX reports Q318 results on 12/21. We are lowering our unit comp to 0% from 3%, offset by lower SBC, so our EPS stays at $1.01. After addressing 4 focal points, we find it difficult to be constructive when industry demand is eroding and spending needs are increasing. However, trough valuation keeps us at PP for now. We are lowering our PT to $64 (was $75).
This AM (12/4/2018), KMX announced the rollout of its new omni-channel offering that it’s launching in Atlanta. KMX plans for it to be available to a majority of its customers by Feb. 2020. In its FQ2 call, KMX said that it would bring this experience to a major metro market by year end; however, it did not name the market nor signal a timeline for a broader roll-out.
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).
This AM (10/30/2018), AN reported total rev growth of -1.5% missing Cons of +2.3% and our -0.1%. EPS of $1.24 met Cons but beat our $1.30 helped by asset sales and taxes. SG&A came in worse than expected stoking concerns on AN’s elevated level of spend in today’s SAAR environment. AN announced a 7% stake in the #2 online auto dealer. AN -3% vs S&P +1%.
This morning (10/24/18), LAD reported Q3 results. Total revenue growth of 15% missed cons. of 17% but beat our 12%. EPS of $2.83 missed cons. of $2.53 and our $2.49. LAD maintained its full-year guidance, but downplayed the importance of the number, given their preference to move away from guiding. Shares were up 13% (vs. -3% for the SP 500).
This morning (10/23/18), ABG reported Q3 2018 results. New and used unit comps were +6% and +8%, respectively. Total revenue growth of 10% beat Cons. +5% and our +8%. New same-store $GP/Unit was down 6% while used was up 2%, and F&I down 1%, leading total front-end yield down 2%. EPS of $2.21 beat consensus of $1.88 and our $2.02. ABG also bought back 2-3% of outstanding shares Q4 to date. Shares were up 11% on the day (vs. a 1% decline for the S&P 500).
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 decreasing estimates and rolling our price target to a year-end 2019 value of $37 (was CY 18 of $46). Our price target uses a 7.5x EV/Adj. EBTITDA, in-line with both peers and where shares currently trade today.
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