EUR 480.25 For Business Accounts Only

Pick of the Fallen Spins: KAR

Our previous Fallen Spinoff analysis (July 2019) saw value creation in Perspecta, Inc. (PRSP), and our entry recommendation at $23.70 rallied to its pre-pandemic high of $29.50 in February 2020 (a +25% return, now back to our recommendation levels dropping with the market). Our newest screening process yielded KAR Auction Services, Inc. (KAR), which we believe has several catalysts for growth and will create value in the post-pandemic used auto auctions space.

Fallen Spinoff Screening Criteria...
We screened KAR Auction Services, Inc. (KAR) out from previously completed Spinoffs based on the below criteria. The other names from our screen have been placed on our watchlist for future catalysts.

Past 3 years of completed Spinoffs (2018-20);
Over $1bn market cap as of May 18, 2020;
Manageable Net Debt to EBITDA ratios (less than 4x);
Spin-to-date (May 18, 2020) returns between -10% and -50%;
Strong free cash flow and yield;
Fundamentals are intact despite share price drop;
Trading time frame with the 2-year tax-free takeover period in mind;
Strong long-term upside on Base and Bull cases;

The Edge View...
Essential Service Post-COVID: Once the pandemic settles and people emerge from quarantine, the used and salvage vehicle market is likely to see an uptick in operations. Employees increasingly working from home will be evaluating their family’s needs for multiple vehicles, meaning the number sold or disposed of is likely to increase, meaning more business for KAR in the long-term. Additionally, given there are some people who are managing their quarantine without any use of their vehicles at all (and the unknown time span needed for the lockdown to lift), some of those vehicles will have sustained damage from lack of use and need to be salvaged – again, more business for KAR and its auctioning services.