Auto part retailers were down -30 to -42% through August but are up +17 to 47% since. To gauge current analyst expectations, we surveyed buy side investors to sort out top ideas, relative positioning, and near-term expectations for comps. We also tackled contentious topics including weather, the impact of the 09-11 SAAR air pocket, AAP margin trajectory, tax reform, and valuation methodology.
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The tax overhaul is adding a lot of complexity to fundamentals as investors and companies we speak with struggle to digest consensus expectations and current valuation metrics. We sifted through both Factset and Bloomberg estimates to calculate a bottoms-up consensus of ONLY analysts that have revised estimates on tax reform.
In our first tax reform note we studied numerous angles on tax reform. As a continuation, we are studying additional angles and also adjusting numbers and price targets (Exhibit 1). While we remain concerned of the long-term risk/reward of tax reform, near-term we expect consensus EPS revisions to occur as the rewards are easier to forecast than the risks.
Earlier this morning (1/2/18), Mike Kiernan, Wolfe’s Director of Research, sent around the Wolverine update for the firm’s top fundamental picks for the next 6-12 months (see his email below). Always a believer in marrying the fundamentals with the technicals, I thought it would be helpful to provide the charts for each. While a few have some work to do, there are plenty of constructive setups on both the long and short side.
LKQ is a complex auto parts distribution business for which we see at least 20 secular, cyclical, and company specific earnings drivers in the coming years. Heading into 2018, we are positive on the potential for Stahlgruber’s closing to drive materially higher consensus estimates, a lower tax rate and greater M&A due to tax reform, and on numerous other company specific catalysts, the most topical of which are detailed below.
We expect organic volumes to accelerate given 1) integration of recently lapped acquisitions 2) rising off-lease supply (est. 80% market share), 3) ADESA is also receiving a boost to volume from an indirect GM account win as a result of GM’s Retail and lease subvention strategy. 4) KAR’s recent TradeRev acquisition can expand KAR’s TAM by addressing the Dealer to Dealer channel and provide upside to estimates as Consensus has likely not factored this deal into estimates. We believe secular growth drivers remain intact at IAA supporting continue volume growth with potential for RPU growth from younger vehicle mix.
KMX reported 3Q 2017 before the open (12/21/2017). Used unit comps of 2.7% (0% ex-hurricane) were below Consensus of 4.7% and our 3.0% setting up tough compares. EPS of $0.81 ($0.05 tax benefit) met Consensus of $0.81 but beat our $0.73 as KMX improved wholesale and CAF margins partially offset by a weaker comp and buy back. Shares were down -3.5%.
SSS trends are concerning, particularly with a hurricane benefit. 3rd party financing penetration continues to drift lower and we are increasingly hearing more rumblings of an overdue pull-back from specialty subprime lenders. However, positively, KMX’s under-appreciated Wholesale segment is improving, and CAF, while not improving, has stabilized thus de-risking the near-term downside scenario. The pullback in KMX shares prior to quarter end also helped SBC and SG&A per unit.
After years of inflating asset prices via credit let’s unwind QE, raise interest rates, meddle in regional wars, reduce homeownership incentives, rush a radical tax overhaul including reducing corporate taxes, rebalance personal taxes, and expanding the fiscal deficit, all during a period of trough unemployment. Let’s just throw all of the economic models out, nothing can go wrong here, I’m psyched let’s go shoot some birds
Monday AM (12/11/2017), LKQ announced the Stahlgruber acquisition (a top 2 German aftermarket distributor with presence in Austria/Czech Republic). Stahlgruber generates $1.9B in revenue, $151M in EBITDA (7.9% margin). LKQ will pay ~$1.8B, and expects Year 2 accretion of $0.17 - $0.19. Shares were flat with deal widely anticipated by investors due to leaky media reports.
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