One of the things I love about working on this series of Insider Weekends posts each weekend is discovering new companies that I might not have looked at otherwise. This week I came across Insurance Auto Auctions or IAA (IAA), a company, as the name indicates, runs auctions for insurance companies that are getting rid of totaled cars. Fleet operators that want to sell high mileage cars or dealers that want to clear their lot of overflow or damaged vehicles can also use IAA. The company was spun out of KAR Auction Services Inc. (KAR) in June 2019.
Given the kinds of vehicles IAA sells, I would have expected a low margin business but was surprised to find that the company sports gross margin approaching 40%, EBITDA margin of 30% and net income margin of 16%. As you can guess by looking at the EBITDA and net income margins, the business is leveraged with net debt of $2.31 billion for a company with a market cap of $4.76 billion. IAA’s bigger brother Copart (CPRT), sports even more impressive margins with gross margin approaching 50% and net income margin of nearly 35%. To put this in perspective, Copart’s net income margin exceeds that of Apple (AAPL), Meta Platforms (FB) and Alphabet (GOOG). These margins at Copart are not a pandemic related phenomenon on account of the recent demand for used cars. Net income margin was also above 30% pre-pandemic and the company managed to keep it above that threshold during the entire pandemic.
IAA and Copart together pretty much own the market in this segment of the vehicle auction business. Both companies saw their revenue grow more than 30% last quarter. Growth in the future is expected to moderate but they still expect to notch double digit revenue growth. Given its leveraged balance sheet and lower margins, IAA sells at a significant discount compared to Copart. IAA is just starting to ramp up internationally while Copart already has a presence in nearly a dozen countries.
This is the first insider purchase at IAA since the company was spun off. Multiple insiders have exercised shares recently without selling them, which we view as a positive sign. Peter Kamin has been an independent director of IAA since its spin-off in June 2019. He is a Managing Partner at 3K Limited Partnership and was previously the Founding Partner at ValueAct Capital from 2000 to 2011. We have tracked Mr. Kamin’s insider purchases over the years and while he did well with his purchases of Unilens Vision in 2014 and more recently with his well timed purchases of Interpace Biosciences Inc (IDXG), I have also seen him get into Tile Shop Holdings (TTS) very early. He continued averaging down into Tile Shop Holdings from 2017 to 2019 and benefited from the eventual rebound in the stock from near penny stock territory.
Welcome to edition 607 of Insider Weekends. Insider buying declined last week with insiders purchasing $154.03 million of stock compared to $228.41 million in the week prior. Selling also decreased to $946.14 million compared to $1.63 billion in the week prior.