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Cash in from the Used Car Market

December 19, 2019

I am constantly consuming news and information.

From the start of my day with a pile of newspapers and financial journals to my Bloomberg Terminal and other media, I take notes and develop ideas.

Then, I set about drilling down to find the best companies to recommend to you.

In doing so, I often stumble upon companies I never would have gone looking for.

I recently did this with a company called Copart (CPRT). It runs used car auctions, with a specialty in damaged and salvaged cars that insurers have totaled.

I know that cars these days are ever more complex, with all sorts of smart electronics, safety features and buffer zones. So if you’re hit, the repair bills rise swiftly.

The parts of the car can be worth more than the sum of those parts. And this is where Copart comes in.

But in analyzing the company and its stock, it’s way too expensive. It’s valued at 10.97 times book value and 9.60 times sales.

And even with some very impressive financials, it’s too much of a premium for me.

Copart (CPRT) Price History—Source: Bloomberg Finance, L.P.

I have always been a car guy.

I’ve owned countless cars, including plenty of Mercedes Benz, Audis, BMWs and a plethora of Porsches, among others.

I even restored a 1969 Mercedes Benz 280 SL Pagoda Top Roadster some years ago.

When I was in grammar school, I even started my own business cleaning and detailing cars for individuals and fleet owners, including my local police department.

And I also worked briefly at a friend’s service station to improve my mechanical skills. So, I know a few things about cars and the car market.

So after I passed on Copart, I started digging around the sector and found a peer in KAR Auction Services (KAR).

It too is in the car auction business, but it’s not just for damaged cars.

It wholesales cars that dealers take on trade or want to put on their lots. And outside the US, many markets want older US cars, damaged or not.

Revenues are doing well, up 9.00% on a trailing 12-month basis. And the operating margin is a fat 16.60%, which drives a return on equity of 14.80%.

The company has plenty of cash and controlled debt at only 37.00% of assets.

And unlike Copart, KAR pays a good dividend, currently yielding 3.48%.

It is currently lower after spinning off IAA Inc. (IAA) in June, which runs car dealerships and related services.

 

Kar Auction Services (KAR) Stock Price—Source: Bloomberg Finance, L.P.

The stock is more of a value after the recent mixed quarterly report, which dealt with the post spin-off auction businesses. But that is what I like about the resulting company.

We get an auction company without the troublesome dealerships. And with the stock down a bit, it’s now valued at a 10% discount to trailing sales and only 1.73 times book.

Kar Auction Services (KAR) is a value buy in an important developing market segment, ideally for a tax-free account.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life