Since buying from forced sellers is one of my favorite investment strategies, I always like to look at spin-offs. At the end of today, September 30, ADP, the enormous payroll processor, is spinning off its highly profitable and growing car dealer services company, CDK Global. Each holder of ADP on September will be receiving 3 shares of of CDK for each share of ADP.
Since ADP is in the S&P 500 and CDK will not be (its joining the smaller S&P Midcap index), every S&P500 index fund that owns ADP will need to sell their CDK shares quickly to stay aligned with the proper index composition. Because the amount of money invested in midcap funds is dwarfed by the S&P 500 funds, there will be many more forced sellers of CDK from the SP500 funds than forced buyers from the midcap funds. The result is a potential opportunity for a mispriced stock.
How good is the opportunity? Well, its good enough that I decided to read the CDK roadshow materials and run some simple calculations. Unfortunately, its not a value play, at least at current when issued pricing of around $30.50 share.
Growth investors who believe that CDK’s smaller digital car sales marketing division (373M revenue) will continue to increase at 20% year for years to come and overtake its slower growing but larger back office car dealer services (1500M) division should look at CDK more closely. But I’m a value guy, so I think I’ll take a pass.
Here is my 10 minute analysis. Call me if the stock drops to $20.
Share Price | ||||||
25 | 27.5 | 30 | 32.5 | 35 | ||
Market Cap | 4003 | 4403 | 4803 | 5203 | 5604 | |
Net Debt | 725 | 725 | 725 | 725 | 725 | |
EV | 4728 | 5128 | 5528 | 5928 | 6329 | |
Year | Ebitda | EV/Ebitda | ||||
2012 | 314 | 15.1 | 16.3 | 17.6 | 18.9 | 20.2 |
2013 | 379 | 12.5 | 13.5 | 14.6 | 15.6 | 16.7 |
2014 | 413 | 11.4 | 12.4 | 13.4 | 14.4 | 15.3 |
FCF | FCF Yield | |||||
200 | 4.2% | 3.9% | 3.6% | 3.4% | 3.2% | |
Share Count | 160.1 |