KAR Auction Services, Inc.

 

The views expressed below are those of Anchor Capital Advisors, LLC (“Anchor”) as of the date written and are subject to change at any time.  They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.

 

KAR: NYSE

KAR Auction Services, Inc. is engaged in the provision of used car auction services and salvage auction services.[i] The company has three major divisions in ADESA Auctions, Insurance Auto Auctions (IAA), and Automotive Finance Corporation (AFC)[ii]

Investment thesis

KAR Auction Services, Inc. operates by conducting whole car and salvage auctions, as well as floorplan financing to dealers.[iii] The company will be split into two separate companies[iv], and we think it is undervalued based on the sum of the value of the two parts (sum of parts). We believe, as mentioned later, that the ADESA auction business is stronger than its current reputation and the IAA business is one of the highest quality businesses in the midcap space that we have seen in some time. Sales should continue to grow mid to high single digits, and earnings should grow double digits.

Confirmation through research

In both auction businesses, KAR has strong market share, and operates with rational competitors. In ADESA, they have a 30% share, and in IAA they have a 40% share. Their competitors, Copart[v] and Manheim[vi] have 40% shares in both markets. Since 2008, KAR has only seen revenue decline 5%, indicating it to be a higher quality business than the market gives it recognition for. [vii]  Further, the company has continued to add ancillary services to the auction process such as inspections.[viii] Both KAR’s salvage business, which is primarily driven by insurance claims[ix], and their competitor Copart, have a moat driven by land capacity, environmental regulations, and customer relationships.[x] KAR’s salvage business is high quality thanks to the moat, not being economically cyclical, and the company’s expected future growth. Taking conservative valuations of both segments leads to a value higher than the share price when we purchased KAR Auction Services.

Variant Perception

The market is not assigning a fair value to the business considering the company’s auction businesses, which have strong market share, the lack of cyclicality in the two largest segments of the business, the growth rate, and the sum of parts.


 

Disclosures

  • In order to enhance current and prospective investor understanding of our process, approach, and views, the highlighted investment summary has been selected to illustrate Anchor’s investment approach and/or market outlook. It has not been selected based on performance-related criteria. This investment summary represents a recent investment made and the strategy described may change in the future. Various portfolios actively managed by Anchor may or may not contain this security. Ultimate portfolio design recommendations will be based on in-depth analysis and considerations of factors specific to each client, including risk tolerances, liquidity parameters, return expectations, etc.
  • The views expressed are those of Anchor Capital Advisors, LLC (“Anchor”) as of the date written and are subject to change at any time. Anchor does not undertake any obligation to update the information contained herein as of any future date.
  • Certain information (including any forward-looking statements and economic and market information) has been obtained from sources we deem reliable, but is not guaranteed by Anchor, nor is it a complete summary of available data.
  • The information should not be considered investment advice or a recommendation to buy or to sell the security mentioned. These opinions are not intended to be a forecast of future events or a guarantee of future results. It should not be assumed that investments in such securities have been or will be profitable.
  • This piece is for informational purposes only and should not be construed as a research report.

[i] FactSet Business Description

[ii] IBD

[iii] CL King “Initiating With A Buy Rating” 11 June 2013

[iv] Jefferies “Thoughts From The Road-Expect Spin-Off Completion In Q2 ‘19” 07 September 2018

[v] Jefferies “Initiating With A Buy-Bidding Up Auction Growth” 15 January 2016

[vi] Jefferies “Initiating With A Buy-Bidding Up Auction Growth” 15 January 2016

[vii] FactSet Segment History

[viii] IBD Jefferies “Initiating With A Buy-Bidding Up Auction Growth” 15 January 2016

[ix] Barrington “Initiating Coverage Report KAR Auction Services” 20 January 2010

[x] CJS Securities “KAR: Initiating Coverage, Market Perform, $25 Price Target” 12 June 2013