Not many used car auto buyers know the brand name Adesa, but there’s a decent chance your car was bought or sold at one of their landmark auto auction houses. If you get a chance to check out a wholesale auto auction, it’s a must see as cars are presented through and sold at a rate of about 30-45 seconds per car. Adesa is the key business unit for KAR Auction Services (NYSE:KAR) based out of Carmel, Indiana.
KAR offers comprehensive services for wholesale and used car transactions, from salvage and used-car auctions to a broad range of financial and logistical support such as floor plan financing. The Insurance Auto Auctions division is a salvage-auto auction company serving the total-loss needs of insurance companies.
Used car prices have been rising rapidly for a couple months now. Much of that is due to the lack of available new cars because of chip shortages. Consumers looking to buy a new car at low interest rates are buying used vehicles instead. This has fueled direct-to-consumer car sales via companies like Carvana (NYSE:CVNA) and CarLotz (NASDAQ:LOTZ), the used-car dealership that’s threatening to disrupt the way Americans purchase secondhand vehicles.
In 2020, KAR Auction sold nearly 3.1 million vehicles valued at over $40 billion and generated approximately $2.2 billion in revenue. The company claims 100% of those were digital transactions. Adjusted EBITDA was $375 billion.
KAR Stock Benefits From Huge Addressable Market
The North American addressable market for KAR services is about 40 million used car transactions annually of which 11 million are consumer-to-consumer and 29 million are dealer related. Roughly 10 million out of 29 million dealer transactions are purchased from wholesale auto-auctions such as Adesa.
Although the auction services used to be the bulk of KAR’s business, it now only represents 47% of total revenues. Ancillary and related services make up the remaining parts of the business. These include services such as marshalling, reconditioning, dealer logistics and financing.
The European market appears to be a growth opportunity for the firm as well with approximately 260 million cars in operation on the continent. The competition is very fragmented and Adesa has eight offices in across the region. Although cross-border transactions can often be complicated, the company has the experience and infrastructure in place to make it work effectively.
Pandemic Drives Auctions Via Online Channels
The effects of the Covid-19 pandemic were still being felt during the first quarter 2021 as many physical auction facilities were still closed. Revenues decreased 10%, which includes an 8% decreased in auction service fees and a 21% decline in service revenues. Adjusted EBITDA increased 39% although that included gain-on-sale revenues of $17 million
Due to Covid-related closures, on-premise vehicles sold were down 25.4% to 349,000 and off premise vehicles sold were up 2.54% to 404,000. Currently, all ADESA auction locations in North America are offering vehicles for sale virtually through ADESA Simulcast, DealerBlock and Simulcast+. Most auction locations have resumed offering ancillary and related services is typically allowed by county or state health regulations.
Total debt as of March 31, 2021 was $1.9 billion and cash balances were $699 million. Debt-to-EBITDA ratio came in at 2.98x, down from 3.25x at the end of 2020. Guidance for 2021 calls for adjusted EBITDA of $475 million with operating adjusted EPS of $0.87.
Higher Valuation Now Warranted
KAR stock trades at only 16x 2021 consensus EPS and 15x 2022 consensus EPS, a dirt-cheap bargain by today’s standards! The company does face potential economic cycle declines as large scale purchases such as cars tend to follow GDP trends for the most part. However a strong management team has diversified the revenue stream outside of the core auction business and created opportunities outside of North America, so a higher multiple may be warranted which makes KAR stock undervalued.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. He has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A. in Finance from Texas Tech University.