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Assessing Eminence Capital's 4Q13 positions in Humana and more

Part 3
Assessing Eminence Capital's 4Q13 positions in Humana and more (Part 3 of 7)

Eminence Capital buys a new position in KAR Auction Services

Eminence Capital and KAR Auction Services

Eminence Capital initiated new positions in The Men’s Wearhouse Inc. (MW), KAR Auction Services Inc. (KAR), Humana Inc. (HUM), and Valmont Industries (VMI). The fund exited its positions in Pandora Media Inc. (P) and Tyco International (TYC).

Eminence Capital disclosed a new position in KAR Auction Services Inc. (KAR) that accounts for 2.09% of the fund’s portfolio. KAR Auction Services provides used vehicle auction services.

 

KAREnlarge Graph

In 2013, KAR facilitated the sale of approximately 3.7 million used and salvage vehicles. The company facilitates an efficient marketplace by providing auction services for sellers of used, or “whole car,” vehicles and salvage vehicles through its 229 physical auction locations at December 31, 2013, and multiple proprietary Internet venues. Its 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. ADESA, KAR’s whole car auction services business, is the second largest provider of used vehicle auction services in North America. IAA, KAR’s salvage auction services business, is one of the two largest providers of salvage auction services in North America.

The North American used vehicle auction market is largely consolidated. KAR estimates that Manheim, a subsidiary of Cox Enterprises, and ADESA together represent approximately 70% of the North American whole car auction market. It also estimates that ADESA represents approximately 24% of the North American whole car auction market. The North American salvage vehicle auction market is also largely consolidated with the top two competitors, IAA and Copart, Inc., together representing over 80% of the market.

KAR reported its fourth quarter earnings, which showed a net loss for the quarter of $17.6 million or $0.13 per diluted share, as a result of non-deductible interest expenses. The company posted a 9% revenue growth of $540.6 million for the quarter, compared to $493.7 million for the fourth quarter of 2012. Adjusted EBITDA for the quarter ended December 31, 2013 increased 9%, to $131.2 million. The company expects 2014 adjusted EBITDA of $580 million to $600 million. The company also expects net income per share of $1.01 to $1.12 and adjusted net income per share of $1.31 to $1.42. KAR expects the combination of investment in technology along with its physical footprint to create value for its customers.

Eminence Capital buys a new position in KAR Auction ServicesEnlarge Graph

As the National Auto Auction Association (the NAAA) has yet to release its 2013 data, KAR estimated that used vehicle auction volumes in North America in 2013 will be approximately 8.7 million vehicles (including approximately 0.4 million vehicles sold online by ADESA prior to reaching a physical auction). The reduction in auction volumes since 2009 is attributable to supply shortages in the North American whole car auction industry caused principally by declines in new vehicle sales and lease originations from 2007 to 2009 and declines in repossessions from 2009 to 2012. KAR expects the industry to experience an increase in whole car auction volumes in 2014 as a result of increasing new vehicle sales and lease originations since 2009, as well as improving credit availability. KAR also believes that salvage volumes will continue to grow over time as the salvage auction industry expands.

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