We now have a uniformly speculative thought: take shares of the online auction for the sale of used IAA cars (NYSE: IAA), to get income by increasing the purchasing power of cars in the USA.
Growth potential and duration : twelve percent for 14 months,10 % per annum for ten years.
Why stocks can go up: since in the USA the wild demand for cars.
How do we act: take shares at the moment 54,98 $.
Our reflections are based on the analysis of the company's business and the personal experience of our financiers, but remember: does not mean, that the investment idea will work like this, how are we waiting. Everything, what are we writing, - these are predictions and guesses, but not a call to action. To hope for our reflections or not - it's up to you.
And what about the author's predictions
Analysis, for example this and this, indicate that, that the accuracy of the prophecies of motivated prices is not great. And this is acceptable: there are always a lot of surprises on the stock exchange and clear forecasts are rarely realized. If the state of affairs was negotiable, then funds based on computer algorithms would perform better than people, but no matter how annoying it may sound, they work worse.
Therefore, we do not try to build difficult models.. The efficiency forecast in the article is the author's expectations. We indicate this forecast as a guideline: as with investment in general, readers decide for themselves, you should trust the creator and focus on the forecast or not.
We love, appreciate,
Investment editorial office
What the company makes money on
The name of the company stands for Insurance Auto Auction - insurance auto auction. IAA runs car auctions, with whom the insured event occurred: tragedy, theft, etc.. Basically, this is an online platform, but the company also holds live auctions. How the company works, can be viewed on her YouTube channel. IAA makes funds on commission from participating auctions for the implementation of certain services.
According to the company's annual report, the company's revenue is divided in the following way:
- Car buyers - approximately ⅔ of revenue. Repair shops, scrap metal dealers and dismantlers. For this category of clients, the company provides similar services., as auctions and help in finding car loans.
- Car dealers - approximately ⅓ of the proceeds. Insurance industry organizations, charity organisations, car dealers, leasing companies and companies, who rent cars. In addition to auctions, IAA provides them with management services, transportation and security of the machines put up for sale.
More or less complete list of paid offers of the organization with their description can be found in the report.
Company segments by type:
- Services - 89,03%. IAA fees from participating auctions for all services rendered to them. Sector gross margin - 41,48 % from his proceeds.
- Machine implementations - 10,97 %. The company's income from the sale of vehicles purchased by it. Sector gross margin - 17,53 % from his proceeds.
Company sales geography:
- USA - 87,73 %. Total sector margin - 14,56 % from his proceeds.
- Other states - 12,27 %. Total sector margin - 10,48 % from his proceeds.
Arguments in favor of the company
Because the conjuncture. The most powerful demand for cars does not slow down even the insane rise in prices - consumers are still willing to pay any money for any car. New cars are still not enough due to a shortage of semiconductors, that's why consumers buy cars on the secondary market.
In the case of the specifics of the IAA business, there are subtleties, but in general, the situation for the company is now favorable. So you can expect an influx of buyers to the company's platform: in conditions of scarcity, it would be logical to expect, that car dealers will resurrect damaged cars or, in the worst case, take them apart.
But outside of seasonal demand fluctuations, IAA is not a bad option for the long term.. The average age of cars in the United States was growing until the recent shortage, because even without the coronavirus crisis, the situation for consumers in the United States was changing for the worse. Therefore, a used car is an opportunity to save money.. So the IAA can count on the influx of consumers for many years in the same way., like auto parts sellers.
Also worth noticing here, that IAA is a rare example of successful digitalization in a predominantly offline industry: the company has greatly developed its digital platforms, which allowed her to squeeze out of her business unprecedented by the standards of a car dealership 15,45% final margin.
Because the car dealership business sucks. If you have been with us for a long time, then, possibly, remember our analyzes of American car dealers: Asbury, AutoNation, Lithia Motors, O’Reilly Automotive и Group 1. There we pointed out the main features of their business.:
- "Syndrome Amazon». Low margin of the main business, which strongly drags down the result of the whole company. Here, except that O'Reilly stands alone with a high final margin of the entire company..
- High marginality of segments, which bring the least revenue.
In this regard, the scenario is very likely, in which IAA will be bought by one of the aforementioned large companies, most likely O'Reilly. IAA business is strong and marginal, and the company itself is not worth very much in relative and absolute figures: P / E 33.37 and market cap $ 7.41 billion.
What can get in the way
Concentration. According to the company report, 40% cars sold on the company's site are accounted for by three unnamed major insurance suppliers. Changing relationships with one of them can spoil IAA reporting.
Heritage. Until the summer 2019 the company was a division of a similar company KAR Auction Services, and the allocation of IAA had several features.
IAA banned for 5 years, following division, compete with KAR in some segments of the car market. There are exceptions, but in these cases, IAA will have to share the proceeds with KAR. There are also restrictions on business expansion. There was also a ban on the sale of the company., but this ban is about to expire or has already expired. This will slow down the growth of IAA's financial performance.
IAA made tax maneuver during separation, and the government can reconsider its decision on it. The American state is intensively developing extractive institutions: eg, the introduction of retroactive large taxes is being seriously discussed. There is a risk here, that the tax audit will "please" IAA with the news of the payment of a large tax. In this case, the company will incur losses, but, on the other hand, it will be a one-time loss. All this needs to be borne in mind.
Accounting. According to the latest report, IAA has a fairly large amount of debts: 294,1 million dollars urgent and 2.189 billion non-urgent. The company has enough money now, to pay off urgent debts: 341,9 mln in accounts and 366.9 mln counterparties in arrears. Such a large amount of debt will be a heavy burden for the company in the future., when it starts to expand, gaining the right to compete with KAR. But by that time, the rates will probably already be noticeably higher., than now, so that servicing old and creating new loans for the company will become significantly more expensive. This problem is relevant for those, who will choose the path of a long-term investor.
It is not that simple. The company sells more than just used cars, and cars, accident victims. That is, the activity on its site depends on the level of activity on the roads.: more activity - more accidents. IN 2020 traffic activity was lower due to coronavirus restrictions, which affected the company's sales not in the best way. From this, the "parent" KAR also suffered losses..
Traffic congestion in America and elsewhere is gradually returning to pre-pandemic levels, but new quarantines could ruin IAA sales. Generally, the lower America and the world are in The Economist's "Normalcy Index", the worse the IAA will be.
What is the bottom line
We take shares now by 54,98 $. Then we have several options.:
- wait for the stock to rise to 62 $ - how much they asked for back in April this year;
- hold shares 10 years, to see, how the company will turn into Amazon from the world of broken clunkers. Well, over long distances, the possibility of buying a company by someone increases greatly..