Auto Dealer
Not Rated

This isn’t the sort of business that usually meets my “value” criteria. Carvana is a high growth business in an evolving industry (e-commerce car dealers) with negative earnings while trading at a huge sales multiple.

However — it made my list when they announced an acquisition of Adesa ($KAR), a more value-oriented business.

Auto dealer landscape:



Acquisition of Adesa US physical auction business — $2.2bn in cash which is ~22x EBITDA based on guided $100m EBITDA contribution
Analyst day — targeting 8-13% EBITDA margins in the long-run
Market share — industry leaders across several different industries
Does Adesa acquisition add to EBITDA margin target? — Not necessarily, it was embedded in analyst day plans that they’d get to 40 reconditioning facilities, this acquisition simply accelerates that plan
John Blackledge Two questions. Will every -- of the 56 locations, will they all have IRC type of capabilities? Or is there, for some of them, overlap in near existing IRC facilities? And how do you envision the $1 billion to be spent across the 56 locations? And then second question, you referenced the $750 cost savings, does that change the kind of the long-term EBITDA margin range?
Ernest Garcia Sure. So on the first question, I think we're not going to get too specific on our plans there yet. There likely will be some locations that we do not add reconditioning capabilities to. That is taken into account in our approximately 2 million incremental unit estimate, and kind of the $1 billion estimate of CapEx is also taken into account in all that. And then as it relates to $750, I would say that that's more of an acceleration to our long-term model than it is an addition to our long-term model. For those of you that remember, at our Analyst Day in 2018, we had simulations that assumed that we would have 40 reconditioning centers around the country, and getting those 40 reconditioning centers would drive down our transport distances and therefore drive down a lot of the expenses that we expect to be driven down by this acquisition. And that was built into our long-term financial model. So this is more locations that they are even better than we assumed the 40 locations would be back then. But that difference is very small relative to just the clear pathway to that benefit showing up in our numbers in a meaningful way faster than it otherwise would have.