Please ensure Javascript is enabled for purposes of website accessibility

Why KAR Auction Stock Plunged Nearly 20% This Morning

By Rich Smith – Feb 20, 2019 at 3:14PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

KAR beat earnings in Q4 -- so why are investors selling?

What happened

Shares of used- and salvaged-car auction operator KAR Auction Services (KAR 1.95%) plunged 19.5% in early Wednesday trading, following a disappointing earnings report Tuesday evening. That's the bad news. The good news is that as of 2 p.m. EST, KAR shares had recovered at least some of their losses and were down "only" 11.2%.

KAR reported a pro forma profit of $0.62 per share for its fourth and final quarter of fiscal 2018, $0.02 better than expected. Sales, however, came up short at just $929 million ($936 million had been expected), despite growing 4% year over year.

Cartoon characters appear puzzled by stock chart with arrow falling through the floor.

KAR beat earnings in Q4 -- so why are investors selling? Image source: Getty Images.

So what

Of course, even with the sales miss, KAR's earnings estimate beat in Q4 2018 seems unlikely to have produced a near-20% sell-off in the stock this morning. So what accounts for that?

In a word: guidance. After giving its numbers for last year, KAR proceeded to tell investors what to expect this year, 2019.

Now what

The good news here is that profits appear likely to grow from the $328 million that KAR earned in 2018. New guidance for the new year is that net income should range from $330 million to $355.5 million. Per share, that will work out to between $2.46 and $2.65 in GAAP net income and between $2.90 and $3.09 in "operating adjusted net income per share."

Problem is, Wall Street has been telling investors that KAR would earn $3.16 per share in 2019. IF KAR beat earnings by a bit in 2018, it now looks like the company will miss earnings by much more in 2019. Hence, the sell-off.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.