JPMorgan cuts KAR Auction stock rating to neutral, target to $20

On Thursday, JPMorgan analysts downgraded KAR Auction Services, Inc. (NYSE:KAR) stock from Overweight to Neutral and lowered the price target to $20.00 from the previous $23.00. The adjustment comes as the automotive auction company faces a slower cyclical recovery in off-lease volumes and potential medium-term pressure on its AFC business due to steep tariffs on new cars. Currently trading at $20.99, KAR shows a high P/E ratio of 45.8x, though InvestingPro analysis indicates the stock is trading at a low P/E relative to its near-term earnings growth potential. Want deeper insights? InvestingPro offers exclusive access to detailed valuation metrics and 8 additional expert tips for KAR stock.

KAR Auction operates in a market that is generally characterized by high barriers to entry and an oligopolistic nature, which often leads to strong pricing power and margins. The company’s online platform, OPENLANE, is a significant player in the auto auction industry, holding the second-largest position in online Dealer-to-Dealer (D2D) wholesale auction services and the top spot in online Commercial-to-Dealer (C2D) auction services. This strategic positioning has historically enabled KAR Auction to generate robust free cash flow, thanks to low working capital requirements. Recent financial data shows a healthy gross profit margin of 46.5% and strong revenue of $1.79 billion in the last twelve months.

Despite the competitive advantages, JPMorgan anticipates a slower recovery for the company in the off-lease segment, which is influenced by steep tariffs on new cars. These tariffs are expected to hinder the cyclical rebound that would typically benefit KAR Auction’s business. Additionally, the AFC (Automotive Finance Corporation) business unit might experience some pressures in the medium term. According to InvestingPro data, KAR maintains a "GOOD" overall financial health score, with particularly strong metrics in growth potential and price momentum, suggesting resilience despite these challenges.

The analysts at JPMorgan remain optimistic about KAR Auction’s potential for solid profit growth over the coming years. This growth is expected to be driven by continued market share gains in the Dealer-to-Dealer space and an eventual recovery in commercial consignor volumes. The company’s ongoing cost containment efforts and exploration of various adjacent markets are also seen as positive factors.

However, the current external pressures and the projected slower pace of recovery in certain business segments have led JPMorgan to adopt a more cautious stance, prompting them to lower the stock’s rating and price target.

In other recent news, OPENLANE Inc. has seen a positive revision in its outlook by S&P Global Ratings, which reflects the company’s improved financial performance over recent years. The ratings agency affirmed all ratings, including the ’B’ issuer credit rating, and indicated a potential upgrade if the company can maintain its leverage below 6x and sustain free operating cash flow to debt above 5%. OPENLANE’s digital marketplace has shown increased profitability, with EBITDA margins projected to exceed 20% in 2024. The company ended 2024 with $540.7 million in total liquidity, which includes $143 million in cash and $397.7 million in revolver availability.

Meanwhile, Kano Group reported a 5% growth in full-year 2024 net sales, reaching SEK 2.6 billion, driven by strong demand for its AI solutions in the legal information sector. The company’s Q4 net sales grew by 4% organically, with an adjusted EBITDA margin improvement of 5 percentage points. Subscription-based sales accounted for 86% of total sales, and the company achieved EUR 14 million in annual run rate synergies. Kano Group aims to continue enhancing its AI features throughout 2025, with a focus on growth in the French and Spanish markets. The company maintains a leverage ratio of 3.0x, aligning with its financial targets.

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