VIC CARS Write-Up

Summary of Report

 Cars.com spin-off from TEGNA is not receiving much attention and management is not talking
about the upside from affiliate agreements rolling off
 Key variant perception is the massive cash flow benefit of the expiration of affiliate agreements,
that will massively inflect free cash flow
 Growth concerns are overblown and the result of starving the business of investment and a poorly
handled platform change that is being addressed
 Valuation is quite cheap when you adjust for the normalized margins once the affiliate discounts
have expired
o Public Comps suggest the company should trade in the teens on a multiple of cash flow
(modest discount to peers due to slower growth and higher leverage)
o Private comps suggest a value of the enterprise close to $3B (valued at $2B right now)
 Tax shield adds additional value that should last for over a decade; additional upside from tax
cuts but this is not part of the base case
 There’s a bit of cost cutting opportunity but much of this will be mitigated with increasing the
sales force
 Catalysts include the discovery of the investment idea, an improvement in the topline outlook,
positive margin surprises (incl. earlier affiliate economics capture) and a potential sale
 Risk include market share loss to incumbents and new entrants (barriers are low), belief that auto
SAAR is peaking, and long-term disintermediation from increased utilization of cars and
autonomous
My Thoughts

 Compelling case for the self-help story

 While the story is not completely unknown (like TLF), I like that most investors are unaware of
the potential power of the cash flow from affiliate agreements ending
 The sheer size of the margin lift from taking better economics from formerly affiliate revenue is
what makes the investment compelling
 I’m worried about share loss and the moat this business has but this is outweighed by the
cheapness of the normalized operations of company
 I do not put much value in cost cutting, the talk of the issues with the platform shift, and tax cuts,
although the tax shield is a nice nugget; it also seems like maintenance capex is a little low
 While the potential sale of the company presents material upside, I do not put high odds on this (I
acknowledge the tax implications of not marketing the whole business now)
 Recommendation: Buy
o Idiosyncratic economic shift should transform the business and overpowers the risk of
weak topline performance
o What would make me re-evaluate a long position: an agreement extending the terms of
the affiliate agreements and/or continued negative comp performance
o I believe the company is ultimately worth $3B-$4B ($240M at 6 - 8% FCF yield);
purchasing the equity at $1.7B (and selling the equity at $2.7 - $3.7B) over a 24-month
time horizon implies a 26% - 48% IRR