EPS of $0.35 beat Cons $0.33 but missed our $0.36 as higher revenue and gross profit, was only partially offset by higher SGA dollars. This was the best corporate call we’ve heard in a long time. IAA put to rest Geico concerns (at 30% share loss), added new disclosure to heighten transparency, affirmed going fully digital in 2H 2020, and sounded fired up about new technology and operational improvements. Shares were up 11%.
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IAA reports 11/12. We think IAA is setup to beat for Q3, but investors will be more interested in the forward guide. We are cutting our Q4 and 2020 volume estimates (Exhibit 6) to assume greater than expected Geico headwinds. Transparency into and out of the spin has been weak - if IAA wants to set a bottom on its stock it will need to address recent concerns on fixed costs (Exhibit 1), address Geico head on, and add back transparency on purchased vehicles and inventory growth.
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.
This AM (08/13/19) IAA reported Q2 with Rev beating Cons but EBITDA missing. However, these results were already known via discontinued ops disclosure in KAR’s 10-Q. The acceleration in volume and clarity around purchase accounting impacting COGS settled shares, which were +5%.
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.