UPDATE: J.P. Morgan Initiates KAR Auction Services with Overweight on Appealing Business Model, Cyclical Recovery

In a report published Monday, J.P. Morgan analyst Ryan Brinkman initiated coverage on KAR Auction Services

with an Overweight rating and $25.00 price target. In the report, Brinkman noted, “BuyKAR for cyclical recovery in its key end market – the market for whole car auctions – prompting faster earnings growth, and for its current historically modest valuation relative to CPRT and 11% FCF yield. The sharp improvement in new car sales and earlier rebound in lease originations lends high visibility into a multi-year cyclical upturn in KAR's key end market. Consequently, we forecast a 2012-2015E EBITDA CAGR of +6.3%, vs. just +2.6% in the preceding two years. The acceleration in EPS is expected to be even more pronounced, helped by leverage and a more favorable credit agreement, with a 2012-2015E EPS CAGR of +13% vs. just +1% in the preceding two years. Our $25 December 2013 price target assumes no multiple expansion (predicated upon 8.6x 2014E EBITDA and 17x P/E), with upside instead driven by our forecasted earnings ramp and capital structure rollforward, helped by strong free cash flow. We additionally note that KAR trades at a greater than historical discount to CPRT (-26% on EV/EBITDA vs. -17% long-term average) and that its 11% FCF yield is amongst the highest in our coverage.” KAR Auction Services closed on Friday at $20.96.