ADESA Inc: A Spin-off With Drive

| About: KAR Auction (KAR)

Carmel, Indiana based ADESA Inc. (NYSE:KAR), the wholesale vehicle auctioneer, facilitates vehicle auctions in North America and offers other services for used car retailers. Originally a wholly owned subsidiary of Allete Inc. (NYSE:ALE), the company was spun-off on September 20, 2004. Armed with a unique business plan, KAR is able to collect fees from both the buyers and sellers of the automobiles without ever actually holding the title of an automobile.

Providing both online and physical auctions for salvage and used automobiles, the company employs almost 11,000 people throughout its 53 used vehicle and 42 salvage auctions. The Auction and Related Services segment also provides services such as vehicle reconditioning, inbound and outbound logistics, vehicle inspections, online auctions, titling, and salvage recovery services. Their other business is vehicle floorplan financing for car dealerships. With over 80 locations in North America, this division provides short-term, inventory-secured financing for the wholesale value of the vehicles that vehicle dealers can purchase.

As the second largest used automobile auction network in North America, the company has come to amass a market capitalization of nearly $2.32 billion. KAR still has its sights set on growth, acquiring six new salvage auctions this year alone. It has also recently revamped its organizational structure and hired industry veteran Bob Schoen, as the head of the e-business center.

KAR fundamentals are no less impressive than its business, with past year revenue growth averaging 12.52%. Its quarterly year-over-year revenue growth was 13.20%, as compared to the industry average of 7.50%. Profitability has likewise remained notable with KAR operating margins of 21.19% more than tripling the 6.26% industry average.

Viewed in light of valuation measures, the price to earnings [P/E] ratio of 17.79 is slightly below the industry average of 17.93. Another indicator of undervaluation is its price to book [P/B] ratio of 1.94 as compared to its peer group average of 3.06. Taking all of the fundamental data, our algorithms calculate that this spin-off has a high probability of benchmark beating returns.

KAR 1-yr chart