Topic: Spinoffs

We like this spinoff and its former parent

General Mills LISTEN:  

KAR AUCTION SERVICES INC. $25 (New York symbol KAR; Manufacturing & Industry sector; Shares outstanding: 133.4 million; Market cap: $3.3 billion; Dividend yield: 5.6%; Takeover Target Rating: Medium; sells used and salvaged vehicles at 250 physical auction sites in North America and over the Internet. The company also provides related services, including vehicle inspection, storage, transportation, reconditioning and financing. To date, KAR has sold more than 6 million vehicles valued at over $40 billion, in 130 countries around the world.


On June 28, 2019, the company completed its spinoff of IAA INC. $44 (New York symbol IAA; Manufacturing & Industry sector; Shares outstanding: 133.4 million; Market cap: $5.9 billion; No dividend paid; Takeover Target Rating: Medium; KAR shareholders received one share of IAA stock for every share held in its parent company.

The new firm operates as IAA (Insurance Auto Auctions) in the U.S., Impact Auto Auctions in Canada, and HBC Vehicle Services Limited in the U.K. It has roughly 40% of the North American salvage market and generates 80% of its business from insurance companies looking to sell vehicles after natural disasters.

As a separate firm, IAA had annual revenue of $1.3 billion in 2018 (34% of KAR’s total revenue), and gross profits of $284 million (17% of the total).

KAR’s remaining operations consist of ADESA, which has 28% of the North American used-vehicle auction market, and Automotive Finance Corporation (AFC), which provides financing to used-vehicle dealers.

Including IAA, KAR’s revenue jumped 56.0%, from $2.42 billion in 2014 to $3.70 billion in 2018. Its overall earnings jumped 74.7%, from $187.8 million to $328.0 million; per-share earnings increased at a faster rate of 83.3%, from $1.32 to $2.42, on fewer shares outstanding.

In January 2019, KAR purchased Dent-ology, which provides “paintless” dent repair and related services. It also purchased European online auction firm CarsOnTheWeb. In all, the company paid $193.5 million for those businesses.

Thanks partly to those new operations, overall revenue in the first quarter of 2019 rose 10.1%, to $1.05 billion from $950.5 million a year earlier. However, higher operating costs and interest expenses cut its earnings by 15.8%, to $94.0 million from $111.7 million; earnings per share declined 14.6%, to $0.70 from $0.82.

KAR ended the quarter with cash of $265.6 million, and long-term debt of $2.65 billion (or 80% of its market cap). However, IAA sold $400 million worth of notes due in 2027 and used the cash for a special dividend to KAR.

Without IAA, KAR will probably earn $1.27 a share in 2019. The stock trades at a reasonable 19.7 times that forecast.

The spinoff will likely prompt KAR to cut its quarterly dividend of $0.35 a share; that would reduce the high 5.6% yield to a more-sustainable level.

KAR is a buy, but only for aggressive investors.

IAA should continue to benefit as more autos head to the salvage market due to the severity of accidents caused by distracted driving. Also, it’s costlier to repair today’s vehicles. Furthermore, IAA recently announced the opening of its fourth location in South Carolina to meet rising customer demand there.

The new company trades at 31.9 times its projected 2019 earnings of $1.38 a share.

IAA is a spinoff buy.


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