| KAR Auction Services operates a complete auction solution located in Carmel, Indiana with offices and facilities throughout North America. The company's core business units include ADESA, a wholesale used vehicle operation; Insurance Auto Auctions (IAA), a salvage auto auction company; and Automotive Finance Corporation (AFC), a capital funding source for the used vehicle industry. | |
KAR operates in an industry that composed primarily of two companies and together they control almost 80% of the market for used car auction services. The remaining 20% is composed of small local auto auctions that will eventually be consolidated into only a handful of companies. The main reason this will happen is because of the high barriers to entry that make it difficult for new entrants to capture significant market share.
The required investment in technology and related infrastructure in addition to ongoing maintenance costs required to meet customers' demands present challenges for new entrants. Large tracts of land and a significant investment in facilities and land improvements are required to build new physical auctions. In addition, the need to comply with regulatory requirements would pose a challenge for new entrants to build a large-scale operation. Larger participants are also able to better develop relationships with many of the major whole car and salvage sellers and buyers, which increases the sellers' flexibility to redistribute vehicles to markets where demand best matches supply in order to maximize proceeds, while also reducing the cost of disposition.
The required investment in technology and related infrastructure in addition to ongoing maintenance costs required to meet customers' demands present challenges for new entrants. Large tracts of land and a significant investment in facilities and land improvements are required to build new physical auctions. In addition, the need to comply with regulatory requirements would pose a challenge for new entrants to build a large-scale operation. Larger participants are also able to better develop relationships with many of the major whole car and salvage sellers and buyers, which increases the sellers' flexibility to redistribute vehicles to markets where demand best matches supply in order to maximize proceeds, while also reducing the cost of disposition.
KAR Auction Services, Inc. provides vehicle auction services in North America. It operates in three segments: ADESA Auctions, IAA, and AFC. The ADESA Auctions segment offers whole car auctions and related services to the vehicle remarketing industry through online auctions and auction facilities. It also provides value-added services, such as auction related, transportation, reconditioning, inspection, title and repossession administration and remarketing, and analytical services. This segment sells its products and services through vehicle manufacturers, rental car companies, and finance companies. The IAA segment offers salvage vehicle auctions and related services that facilitate the remarketing of vehicles for a range of sellers, including insurance companies, dealerships, rental car companies, fleet lease companies, and charitable organizations. This segment also provides title management, vehicle inspection center, and transportation and towing services. The AFC segment offers floorplan financing, a short-term inventory-secured financing, to independent used vehicle dealers. As of December 31, 2014, the company had a network of 65 whole car auction and 168 salvage auction locations. The company was formerly known as KAR Holdings, Inc. and changed its name to KAR Auction Services, Inc. in November 2009. KAR Auction Services, Inc. was founded in 2006 and is headquartered in Carmel, Indiana.
(Summary) (Company) (Daily Chart)
| 5 August 2015 Price $39.39 1yr Target $42.73 Analysts 11 1yr Cap Gain 8.47% Dividend $1.08 Yield 2.74% 1yr Tot Return 11.21% | Market Cap $5.58 Bil 1yr EarnGR 147.01% 2yr EarnGR 34.27% 3yr EarnGR 33.12% 1yr DivGR 24.39% 2yr DivGR 131.69% 3yr DivGR --- Payout Ratio 76.05% | Beta 1.62 EPS (ttm) $1.42 EPS next yr $1.94 P/E 27.74 PEG 2.77 Debt/Equity 1.13 ROA 3.80% ROE 13.20% |
With estimated earnings per share increasing to $1.73 and $1.94 over the next two years, the estimated earnings growth rate would be 45.37% in 2015 and 12.13% in 2016. Estimating that the payout ratio will fall from the current 76% level to a level closer to 60% over the next two years, the dividend could reach $1.10 per share in 2015 and $1.20 per share in 2016. That would result in very lucrative dividend increases of 7.84% in 2015 and 9.09% in 2016.
The Corporate History
KAR Auction Services (formerly KAR Holdings, Inc.) was incorporated in 2006 and commenced operations in April 2007 upon the consummation of the 2007 Transactions. On November 3, 2009, they changed their name from KAR Holdings, Inc. to KAR Auction Services, Inc.
ADESA entered the vehicle remarketing industry in 1989 and first became a public company in 1992. In 1994, ADESA acquired AFC. ADESA remained a public company until 1995 when ALLETE purchased a majority of its outstanding equity interests. In June 2004, ALLETE sold 20% of ADESA to the public and then spun off their remaining 80% interest to shareholders in September 2004. ADESA was then acquired by KAR in April 2007.
IAA entered the vehicle salvage business in 1982, and first became a public company in 1991. After growing through a series of acquisitions, IAA was acquired by affiliates of Kelso & Company and Parthenon Capital in 2005. Affiliates of Kelso & Company and Parthenon Capital and certain members of IAA management contributed IAA to KAR Auction Services in connection with the 2007 Transactions. In a series of transactions between December 2012 and November 2013, the Equity Sponsors sold all of their common stock in secondary offerings.
The Corporate Structure
Today Kar Auction Services is a leading provider of vehicle auction services in North America. They facilitate an efficient marketplace by providing auction services for sellers of used, or "whole car," vehicles and salvage vehicles through their 233 physical auction locations and multiple proprietary Internet venues. In 2014, they facilitated the sale of over 3.9 million used and salvage vehicles. Their revenues are generated through auction fees from both vehicle buyers and sellers, as well as by providing value-added ancillary services, including transportation, reconditioning, inspections, marshalling, titling and floorplan financing. They facilitate the transfer of ownership directly from seller to buyer and generally do not take title to or ownership of vehicles sold through their auctions.
ADESA, their whole car auction services business, is the second largest provider of used vehicle auction services in North America. Vehicles at ADESA's auctions are typically sold by used vehicle dealers, vehicle manufacturers and their captive finance companies, financial institutions, commercial fleet operators and rental car companies to franchised and independent used vehicle dealers. Through ADESA.com, powered by OPENLANE technology, ADESA provides a comprehensive remarking solution to automobile manufacturers, captive finance companies, lease and daily rental car companies, financial institutions and wholesale automobile auctions.
IAA, our salvage auction services business, is one of the two largest providers of salvage auction services in North America. Vehicles at their salvage auctions are typically damaged or low-value vehicles that are predominantly sold by automobile insurance companies, non-profit organizations, automobile dealers, vehicle leasing companies and rental car companies to licensed dismantlers, rebuilders, scrap dealers or qualified public buyers. An important component of ADESA's and IAA's services to their buyers is providing short-term inventory-secured financing, known as floor plan financing, primarily to independent used vehicle dealers through a wholly-owned subsidiary, AFC.
At December 31, 2014, KAR had a network of 65 whole car auction locations and 168 salvage auction locations. Their auction locations are primarily standalone facilities dedicated to either whole car or salvage auctions; however, some of their sites are utilized to service both whole car and salvage customers at the same location. They believe that their extensive geographic network and diverse product offerings enable them to leverage relationships with North American providers and buyers of used and salvage vehicles.
The Three Corporate Business Segments
KAR operates as three reportable business segments: ADESA Auctions, IAA and AFC. Revenues for the year ended December 31, 2014 were distributed as follows: ADESA 52%, IAA 38% and AFC 10%.
ADESA
ADESA serves their customer base through online auctions that are developed and located to draw professional sellers and buyers together and allow the buyers to inspect and compare vehicles remotely or in person. Their online service offerings include ADESA.com, LiveBlock and DealerBlock and allow them to offer vehicles for sale from any location.
Vehicles available at their auctions include vehicles from institutional customers such as off-lease vehicles, repossessed vehicles, rental vehicles and other program fleet vehicles that have reached a predetermined age or mileage and have been repurchased by the manufacturers, as well as vehicles from used vehicle dealers turning their inventory. The number of vehicles offered for sale at auction is the key driver of our costs incurred in the whole car auction process, and the number of vehicles sold is the key driver of the related fees generated by the remarking process.
ADESA offers online and physical auctions as well as value enhancing ancillary services in an effective and efficient manner to maximize returns for the sellers of used vehicles. They quickly transfer the vehicles and ownership to the buyer and the net funds to the seller. Vehicles are typically offered for sale at the physical auctions on at least a weekly basis at most locations and the auctions are simulcast over the Internet with streaming audio and video (LiveBlock) so that remote bidders can participate via online capabilities. Online auctions (DealerBlock) function 24 hours a day, 7 days a week, providing customers with maximum exposure for their vehicles and the flexibility to offer vehicles at buy now prices or in auctions that last for a few hours, days or even weeks. They also provide customized "private label" selling systems (including buy now functionality as well as online auctions) for customers, primarily utilizing technology acquired with the purchase of OPENLANE.
They generate revenue primarily from auction fees paid by vehicle buyers and sellers. Buyer fees and dealer seller fees are typically based on a tiered structure with fees increasing with the sale price of the vehicle, while institutional seller fees are typically fixed. They add buyer fees to the gross sales price paid by buyers for each vehicle, and generally customers do not receive title or possession of vehicles after purchase until payment is received, proof of floorplan financing is provided or credit is approved. They generally deduct seller fees and other ancillary service fees to sellers from the gross sales price of each vehicle before remitting the net amount to the seller.
IAA
As one of the leading providers of salvage vehicle auctions and related services, the company operates as IAA in the United States and Impact Auto Auctions in Canada and serve our customer base through salvage auction locations throughout North America. They facilitate the re-marking of vehicles for a variety of sellers, including insurance companies, dealerships, rental car companies, fleet lease companies and charitable organizations. Auctions provide buyers from around the globe with the salvage vehicles they need to fulfill their scrap demand, replacement part inventory or vehicle rebuild requirements. Fees for services are earned from both sellers and buyers of salvage vehicles.
IAA processes salvage vehicles primarily on a consignment basis. In return for agreed-upon fees, vehicles are sold on behalf of the sellers, which continue to own the vehicle until it is sold to buyers at auction. Other services available to vehicle sellers, for which fees may be charged, include towing, title processing, inspection services, marketing and other administrative services. Under all methods of sale, IAA also charge fees to the buyer of each vehicle based on a tiered structure that increases with the sale price of the vehicle as well as fixed fees for other services.
Auctions are typically held weekly at most locations. Vehicles are marketed at each respective auction site to live bidders as well as to online bidders via IAA's dual platform auction model. In addition, auction listings are available online, allowing prospective bidders to preview and bid on vehicles prior to the actual auction event. IAA's Auction Center feature provides Internet buyers with an open, competitive bidding environment that reflects the dynamics of a live salvage auction. The Auction Center includes such services as comprehensive auction lists featuring links to digital images of vehicles available for sale, a "Find a Vehicle" function that promotes the search for specific vehicles within the auction system and special auction notifications such as "Rental," "Classic," or "Motorcycles." Higher prices at auction are generally driven by broader market exposure and increased competitive bidding. Their mobile device applications provide great flexibility for buyers who interact with their auctions. In 2014, they received recognition for our technology innovation, including: ranking 33rd in Information Week's Elite 100 and being named as a finalist in the Best Customer App category at the Consumerism in IT (CITE) Awards.
Online tools have also been developed to assist consignors in re-marketing their vehicles and establishing salvage vehicle values. In 2013, they launched the IAA Market Value app via the CSAToday® salvage management platform. The Mobile Assignment feature allows consignors to assign vehicles to IAA virtually anytime, anywhere. The Market Value app allows customers to estimate the value of their vehicle whenever and wherever they need to. Through IAA's auction model, vehicles are offered simultaneously to live and online buyers in a live auction format utilizing i-Bid LIVESM. First, physical auctions allow buyers to inspect and compare the vehicles, enabling them to make fully informed bidding decisions. They are also an important part of the bidding process. Second, our Internet auction capabilities allow buyers to participate in a greater number of auctions than if physical attendance was required. Online inventory browsing and digital alerts (via email or through buyer app) reduce the time required to acquire vehicles.
AFC
AFC is a leading provider of floor plan financing to independent used vehicle dealers. They provide short-term inventory secured financing, known as floor plan financing, to independent used vehicle dealers through branches throughout North America. In 2014, AFC serviced over 1.4 million loan transactions, which includes both loans paid off and loans extended, or curtailed. They sell the majority of their dollar denominated receivables with no recourse to a wholly owned bankruptcy remote special purpose entity, which sells an undivided participation interest in such finance receivables to a group of bank purchasers on a revolving basis. They also securitize the majority of their Canadian dollar denominated finance receivables through a separate third-party facility. They also generate a significant portion of our revenues from fees. These fees include origination, floorplan, curtailment and other related program fees. When the loan is extended or paid in full, AFC collects all accrued fees and interest.
In June 2013, AFC acquired Preferred Warranties, Inc., a vehicle service contract business, as part of our strategy to provide new services to independent used vehicle dealers. AFC receives advance payments for the vehicle service contracts and unearned revenue is deferred and recognized over the terms of the contracts, which range from 3 months to 7 years, on an individual contract basis. The average term of these contracts originated in 2014 was approximately 1.5 years. They currently purchase program insurance which provides for satisfaction of certain of the Company's vehicle service contracts related liabilities in the event the Company is unable to perform under the terms of specific vehicle service contracts covered by program insurance.
KAR operates as three reportable business segments: ADESA Auctions, IAA and AFC. Revenues for the year ended December 31, 2014 were distributed as follows: ADESA 52%, IAA 38% and AFC 10%.
ADESA
ADESA serves their customer base through online auctions that are developed and located to draw professional sellers and buyers together and allow the buyers to inspect and compare vehicles remotely or in person. Their online service offerings include ADESA.com, LiveBlock and DealerBlock and allow them to offer vehicles for sale from any location.
Vehicles available at their auctions include vehicles from institutional customers such as off-lease vehicles, repossessed vehicles, rental vehicles and other program fleet vehicles that have reached a predetermined age or mileage and have been repurchased by the manufacturers, as well as vehicles from used vehicle dealers turning their inventory. The number of vehicles offered for sale at auction is the key driver of our costs incurred in the whole car auction process, and the number of vehicles sold is the key driver of the related fees generated by the remarking process.
ADESA offers online and physical auctions as well as value enhancing ancillary services in an effective and efficient manner to maximize returns for the sellers of used vehicles. They quickly transfer the vehicles and ownership to the buyer and the net funds to the seller. Vehicles are typically offered for sale at the physical auctions on at least a weekly basis at most locations and the auctions are simulcast over the Internet with streaming audio and video (LiveBlock) so that remote bidders can participate via online capabilities. Online auctions (DealerBlock) function 24 hours a day, 7 days a week, providing customers with maximum exposure for their vehicles and the flexibility to offer vehicles at buy now prices or in auctions that last for a few hours, days or even weeks. They also provide customized "private label" selling systems (including buy now functionality as well as online auctions) for customers, primarily utilizing technology acquired with the purchase of OPENLANE.
They generate revenue primarily from auction fees paid by vehicle buyers and sellers. Buyer fees and dealer seller fees are typically based on a tiered structure with fees increasing with the sale price of the vehicle, while institutional seller fees are typically fixed. They add buyer fees to the gross sales price paid by buyers for each vehicle, and generally customers do not receive title or possession of vehicles after purchase until payment is received, proof of floorplan financing is provided or credit is approved. They generally deduct seller fees and other ancillary service fees to sellers from the gross sales price of each vehicle before remitting the net amount to the seller.
IAA
As one of the leading providers of salvage vehicle auctions and related services, the company operates as IAA in the United States and Impact Auto Auctions in Canada and serve our customer base through salvage auction locations throughout North America. They facilitate the re-marking of vehicles for a variety of sellers, including insurance companies, dealerships, rental car companies, fleet lease companies and charitable organizations. Auctions provide buyers from around the globe with the salvage vehicles they need to fulfill their scrap demand, replacement part inventory or vehicle rebuild requirements. Fees for services are earned from both sellers and buyers of salvage vehicles.
IAA processes salvage vehicles primarily on a consignment basis. In return for agreed-upon fees, vehicles are sold on behalf of the sellers, which continue to own the vehicle until it is sold to buyers at auction. Other services available to vehicle sellers, for which fees may be charged, include towing, title processing, inspection services, marketing and other administrative services. Under all methods of sale, IAA also charge fees to the buyer of each vehicle based on a tiered structure that increases with the sale price of the vehicle as well as fixed fees for other services.
Auctions are typically held weekly at most locations. Vehicles are marketed at each respective auction site to live bidders as well as to online bidders via IAA's dual platform auction model. In addition, auction listings are available online, allowing prospective bidders to preview and bid on vehicles prior to the actual auction event. IAA's Auction Center feature provides Internet buyers with an open, competitive bidding environment that reflects the dynamics of a live salvage auction. The Auction Center includes such services as comprehensive auction lists featuring links to digital images of vehicles available for sale, a "Find a Vehicle" function that promotes the search for specific vehicles within the auction system and special auction notifications such as "Rental," "Classic," or "Motorcycles." Higher prices at auction are generally driven by broader market exposure and increased competitive bidding. Their mobile device applications provide great flexibility for buyers who interact with their auctions. In 2014, they received recognition for our technology innovation, including: ranking 33rd in Information Week's Elite 100 and being named as a finalist in the Best Customer App category at the Consumerism in IT (CITE) Awards.
Online tools have also been developed to assist consignors in re-marketing their vehicles and establishing salvage vehicle values. In 2013, they launched the IAA Market Value app via the CSAToday® salvage management platform. The Mobile Assignment feature allows consignors to assign vehicles to IAA virtually anytime, anywhere. The Market Value app allows customers to estimate the value of their vehicle whenever and wherever they need to. Through IAA's auction model, vehicles are offered simultaneously to live and online buyers in a live auction format utilizing i-Bid LIVESM. First, physical auctions allow buyers to inspect and compare the vehicles, enabling them to make fully informed bidding decisions. They are also an important part of the bidding process. Second, our Internet auction capabilities allow buyers to participate in a greater number of auctions than if physical attendance was required. Online inventory browsing and digital alerts (via email or through buyer app) reduce the time required to acquire vehicles.
AFC
AFC is a leading provider of floor plan financing to independent used vehicle dealers. They provide short-term inventory secured financing, known as floor plan financing, to independent used vehicle dealers through branches throughout North America. In 2014, AFC serviced over 1.4 million loan transactions, which includes both loans paid off and loans extended, or curtailed. They sell the majority of their dollar denominated receivables with no recourse to a wholly owned bankruptcy remote special purpose entity, which sells an undivided participation interest in such finance receivables to a group of bank purchasers on a revolving basis. They also securitize the majority of their Canadian dollar denominated finance receivables through a separate third-party facility. They also generate a significant portion of our revenues from fees. These fees include origination, floorplan, curtailment and other related program fees. When the loan is extended or paid in full, AFC collects all accrued fees and interest.
In June 2013, AFC acquired Preferred Warranties, Inc., a vehicle service contract business, as part of our strategy to provide new services to independent used vehicle dealers. AFC receives advance payments for the vehicle service contracts and unearned revenue is deferred and recognized over the terms of the contracts, which range from 3 months to 7 years, on an individual contract basis. The average term of these contracts originated in 2014 was approximately 1.5 years. They currently purchase program insurance which provides for satisfaction of certain of the Company's vehicle service contracts related liabilities in the event the Company is unable to perform under the terms of specific vehicle service contracts covered by program insurance.
My Perspective
This is one of those industries that no one really thinks about very often, if at all. But automobile sales, salvage, maintenance and insurance is a huge business. With only two or three major players in this area, additional consolidation going forward, and a high barrier to entry, this is an industry that's very well entrenched and the future of KAR really looks bright.
I like KAR Auction Services and I intend to start a position in this company in the next few weeks. I'll admit that the price, P/E and PEG are currently a little high but I have the luxury of waiting for a better opportunity to enter a buy. But I like this company's earnings and dividend growth rates. I think this will be a great addition to my portfolio.
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