Given the pull-back we revisited our model and come away more negative near-term. We missed a few trends in Q4 and Census data came in light. We are significantly lowering Q1 17 and 2017 estimates (Exhibit 6) and reducing our CY 2017 Fair Value to $162 (was $165).
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On 3/2/17 we launched on KAR with an Outperform rating and $52 Price Target. Our Outperform thesis was predicated on ADESA being a beneficiary from the increased volatility of the auto market coupled with the market mixing into ADESA’s two highest market share segments: Off-lease and Repossessions while also receiving a tailwind from an indirect GM account win. We are also positive on accelerating trends in IAA and see less pronounced, albeit continued, headwinds in AFC in 2018.
A perfect storm is brewing through a rising supply of late model vehicles, softening demand, and declining used car prices all of which will combine to make the used car ecosystem less efficient. Since KAR’s ADESA segment is a market maker and more of this supply is flowing through its two highest market share segments (off-lease and repo) it stands to directly benefit from inefficiency while also seeing an increased uptake of its value added ancillary services. While we are concerned about the impact of used car pricing in the IAA and AFC segments, we see the complementary nature of KAR’s businesses (Exhibit 10) coupled with accelerating accident frequency and severity (Total loss mix) helping to mitigate downside risk.
Today before the open AZO reported FQ2 17 results. SSS of 0.0% missed Consensus of 1.7% and our 1.5%. EPS of $8.08 missed Consensus of $8.19 and our $8.09. The adoption of a new SBC accounting standard helped EPS by $0.37. AZO’s FQ2 17 quarter was off to a strong start until changes in tax refund disbursements caused comps to inflect negatively. This inflection occurred amidst unseasonably warm weather and a more pronounced increase in gas prices making FQ3 a critical quarter.
In the prior call AZO noted that the first week of November was challenging as a result of the election. GPC commentary and AAP acceleration suggested December was strong but January was weak. For comparisons, in FQ2 16 AZO noted consistent monthly trends but saw weakness in cold weather categories and strength in others.
Yesterday morning (2/21/17) GPC reported Q4 16 earnings. Sales increased +2.7%, which was below Consensus by 10bps but above our estimate by 50bps. EPS of $1.02 met Consensus of $1.02 and our $1.01. Initial 2017 EPS guidance of $4.70 - $4.80 was below Consensus of $4.91 but above our $4.72. GPC shares were down -3% on the day.
Yesterday AM (2/20/17) AAP reported Q4 16 earnings. AAP’s 3.1% comp, which beat our 0.5% and Consensus of -0.2%, was its best comp since 2010. However, operating margins came in light and declined by 172bps and as a result Adj. EPS of $1.00 came in below Consensus of $1.08 and our $1.10. 2017 Operating margin guidance of 9.7% at the mid-point also came in lighter than Consensus of 10.0% and our 10.1%.
Yesterday AM, 2/15/17, LAD reported Q4 16 results. Total Revenue growth of 15.0% beat Consensus of 11.0% and our 13.6%. Adj. EPS of $1.86 was in line with Consensus of $1.87 and our $1.86 (Exhibit 5). LAD also reaffirmed 2017 guidance. As always, LAD management was flush with details that we believe alleviated investor concerns around market share, Chrysler expansion, and integration/margins. LAD shares were up 2%.
This morning (2/15/17) LAD reported Q4 16 results. Total Revenue growth of 15% beat Consensus of 11.0% and our 13.6%. Adj. EPS of $1.86 was in line with Consensus of $1.87 and our $1.86. LAD also reaffirmed 2017 guidance. Our initial read-through to the print is in-line to slightly positive. We believe the volume strategy is working, but see continued risk to margins given the volume based strategy and incentive environment. We also see LAD as an initial beneficiary from the election on higher sentiment, but believe action from the administration will be needed to support the lift.
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