+20% Rally Since May 28 Entry, Revised Valuation Shows Further Upside
Recovering from the pandemic is at the forefront of KAR Auction Services, Inc.’s (KAR) most recent earnings, in which the company generated 91% of Y-o-Y revenues despite the nationwide lockdowns. The conclusion of $550m in private equity investments and a deep management pay cut have helped shore up the company’s cash position, positioning KAR to come out the other side of the pandemic stronger than ever. We continue to see upside even after the recent 20% rally.Earnings Update...
On August 4, 2020, KAR Auction Services, Inc. (KAR) announced its Q2FY20 earnings results. The company’s revenue was $409m (higher than The Edge’s estimate of $391m), while adjusted net loss was $32m (lower than The Edge’s estimate of $41m). KAR’s Q2FY20 adjusted EBITDA was $80m per share, beating The Edge’s estimate of $69m per share.
What We Said…
Management buying shares on the open market, the implicit involvement of an activist on the board, and the resumption of an essential service after lockdowns are lifted all provide compelling reasons to look at KAR from a value standpoint. Since our initial recommendation on these catalysts (May 28, 2020, see our analysis here), the stock has rallied +20% to date, outperforming the S&P 500 Index’s return of +11% in the same period.
The Edge View…
Business is quickly recovering for KAR, which has generated 91% of June 2019 revenue collection in the same month this year (June 2020). Additionally, KAR’s liquidity position remained healthy with net debt of $1.2bn (at 3.4x on FY21E EV/EBITDA), including a cash balance of $1bn as of June 30, 2020. During the quarter, KAR concluded $550m of strategic investments from PE investors like Apex Partners and Periphas Partners that converts into common stock at $17.75 per share. Furthermore, the company announced a 50% pay cut for the management team, and the CEO, CFO and Chairman will forgo 100% of their base salaries in Q2FY20 to conserve cash.
We believe with a private equity investment of $550m, KAR is coming out the other side of the pandemic in a stronger position.
KAR Auction Services is a holding company. Through its subsidiaries, the company provides used vehicle auctions and related vehicle remarketing services in North America and Europe. The company facilitates a marketplace by providing auction services for sellers of used, or whole car, vehicles through its North American physical auction locations. The company's segments include: ADESA, Inc.'s Auctions, which provides whole car auctions and related services to the vehicle remarketing industry in North America through online auctions and auction facilities; and Automotive Finance Corporation, which provides floorplan financing to independent used vehicle dealers through branches throughout North America.
The Edge Group - Global Fundamental Catalyst Investing. The Edge provides investors with access to hidden corporate value from Global Special Situations using a pioneering approach to investments. Founded in 2005 by fund management and investment banking professionals to provide high quality, private equity-level research on Global Corporate Divestitures for the benefit of fundamental event-driven, growth and value-oriented investors in this difficult to track, but proven investment space.
The Edge will look to screen and analyze include Spinoffs; Reverse Morris Trusts; Squeeze Outs; Privatizations; Demutualization; Deep Discounted; Rights Issues; Rights Offering; Restructuring; Insider Purchases / Buying Change of Management / CEO Change; Deteriorating fundamentals; Post-Bankruptcy; Reorganization; Tender Offer; M&A Deals; Secondary Offering; Share Swap; Thrift Conversions; Share Buybacks; Activist; Mergers. All analyzed from a fundamental point of view.
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