KAR Auction Services, Inc (KAR, Financial) is a provider of vehicle auction services in an e ective duopolymarket structure. Last year’s pandemic forced the shutdown of physical auction sites but hastened adoption of the company’s long-term move towards digital auction tools, an inherently more profitable business. Recovery hopes were dashed following fourth quarter earnings as it became apparent how important sourcing channels are for the company. Currently, vehicle supply remains constrained, mainly due to limitations on new vehicle production, which would free up o -lease vehicles destined for auction. While the stock reflects investor frustration by sporting a valuation implying no recovery, we see significant opportunity given the history of high free cash flow conversion (still maintained, even at these cyclical lows). Similarly, we see no reason to doubt the resolution of new car production issues, easing supply issues for the auction business.
From Keeley Teton Small Cap Select Value Fund's first-quarter 2021 commentary.