KAR Auction Services, Inc. (KAR) in Carmel, Ind., provides used vehicle auctions and related vehicle remarketing services for the automotive industry in the United States, Europe, Canada, Mexico, and the United Kingdom. KAR shares have slumped 8.7% in price over the past year and 10.6% year-to-date to close yesterday’s trading session at $16.13. The stock is currently trading above its 50-day moving average but slightly below its 200-day moving average.

Wholesale prices for used cars and trucks, a leading indicator of consumer used-vehicle prices, are at sky-high levels due to the high demand amid low supply. “The average price of a vehicle sold at physical auctions is now more than $5,000 higher than this same time in pre-pandemic 2019,” said Tom Kontos, chief economist for KAR Global, which is based in Carmel, Ind. Due to the pandemic-related lockdowns and a global semiconductor chip shortage, automakers have been compelled to cut their production. The new-vehicle shortage is further driving the demand for used cars. The average list price for used vehicles hit a record $26,971 in October, up 25% year-over-year and 38% compared to 2019 pre-pandemic levels. KAR shares have gained 13.8% in price over the past month.

However, the company’s fundamentals look sluggish. KAR reported $532.20 million of total revenue in its fiscal third quarter, indicating a 10% decline year-over-year. On its bottom line, its adjusted net income came in at $11.80 million, compared to $58.50 million in the same period last year. And its adjusted net income per share was $0.08, which missed the $0.10 consensus estimate by 20%. This also represents a $0.45 decline from its year-ago value.

Here is what could shape KAR’s performance in the near term:

Mixed Valuation

In terms of forward P/E, KAR is currently trading at 98.79x, which is 344.9% higher than the 22.21x industry average. Also, its 29.03 forward EV/EBIT ratio is 68.1% higher than the 17.27 industry average.

However, KAR’s forward Price/Sales is 43% lower than the 1.60x industry average, and its 56.7% forward Price/Book is lower than the 2.91x industry average. 

Mixed Analysts Estimates

Analysts expect KAR’s revenues to increase marginally in the current year and 10.8% in the next year. However, its revenue is expected to decline 4.8% year-over-year to $503.96 million in the current quarter. The company’s EPS is expected to rise 400% in the current quarter and 39.2% in the current year. But the Street expects KAR’s EPS to decline 68.9% year-over-year to $0.14 in the next quarter.

Bleak Past Performance

KAR’s revenues have declined at a 6.6% CAGR over the past three years, while its net income has declined at a 53.3% CAGR over the past three years. Also,  its EBITDA and EBIT have declined at CAGRs of 14.3% and 22.2%, respectively, over the past three years.

Mixed Profitability

KAR’s 42.08% gross profit margin is 42.4% higher than the 29.55% industry average. Also, its 16.70% EBITDA margin is 23.5% higher than the 13.51% industry average.

However, KAR’s 0.62% and 2.07% respective ROA and ROTC are 88% and 69.3% lower than the industry averages.

POWR Ratings Reflect Uncertain Prospects

KAR has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of C for Value, which is consistent with its mixed valuation.

KAR also has a C grade for Quality, in sync with its mixed profitability.

Of the 26 stocks in the Auto Dealers & Rentals industry, KAR is ranked #20.

Beyond what I have stated above, one can also view KAR’s grades for Sentiment, Growth, Momentum, and Stability.

View the top-rated stocks in the Auto Dealers & Rentals industry here.

Bottom Line

KAR shares have gained significantly in price over the past month due to investors' interest and the sky-high used car prices. However, the company’s weak fundamentals make its near-term prospects look uncertain. Moreover, the company’s 1.12 beta  makes it highly volatile. So, we think it could be wise to wait for its prospects to stabilize before investing in it.

How Does KAR Auction Services, Inc. (KAR) Stack Up Against its Peers?

While KAR has an overall POWR Rating of C, one  might want to consider looking at its industry peers, AutoNation, Inc. (AN), Penske Automotive Group, Inc. (PAG), and Rush Enterprises, Inc. (RUSHA), which have an A (Strong Buy) rating.

Note that AN and PAG are two of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.

KAR shares were unchanged in premarket trading Tuesday. Year-to-date, KAR has declined -13.33%, versus a 23.91% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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