CSK Auto Corporation (NYSE:CAO) is a specialty retailer of automotive parts and accessories that has performed extremely well during the last year despite difficulties in the sector. The stock currently sits about 70% above its 52-week low and only cents away from making new highs. Some investors are convinced, however, that the stock is trading well below its intrinsic value...

Karsch Capital Management currently holds a 9.32% stake and is one of these investors. The activist hedge fund demanded this morning that the company's board of directors immediately conduct a review of strategic alternatives in which it would weigh the relative merits of selling the company versus giving a new management team time to turn around the company.

Karsch acknowledges that both options would be viable alternatives for the company. A sale of the company would be successful because (1) the company is highly attractive to other auto-parts retailers given its past success with mergers, strong potential synergies and unique real estate on the West Coast, and (2) the company is highly attractive to private equity firms because of the strong cash flows and recent strength of the auto M&A market. The hedge fund also noted that it had received several inquiries from private equity firms showing interest in the company and believes any sale would come at a substantial premium even to today's price.

Interestingly, Karsch is not only interested in a quick sale of the company. The hedge fund admitted that with the leadership and vision of an above-average CEO, they believe CSK Auto could execute an easily achievable operating margin of 9% in 2009 and retain its current 8x forward multiple on their EBITDA projections, which would result in a share price well above $30/share over the next 18 months. CSK Auto will also be able to eliminate a number of one-time expenses that hit the stock last year. And finally, the auto industry is one in which turnarounds have historically seen a higher rate of success.

These days hedge funds and private equity firms are pulling in billions of dollars each year, earnings enormous rates of return for their clients. These returns are not made by overpaying for companies; rather, many investors opt for a quick sale instead of a long-term turnaround that would yield far more value. Karsch has outlined both options today in its letter to the board. A sale of CSK Auto may still be the best options, but it would depend on the bids and various execution risk factors associated with a new management team.

In the end, CSK Auto is a great potential investment given the involvement of a hedge fund that understands how to unlock shareholder value. Unfortunately, the company's board of directors doesn't have the best track record after two accounting probes, a near bankruptcy and chronic underperformance relative to competition. Consequently, Karsch has demanded to be an active part of any turnaround process and threatened a proxy fight if they are cut out. Great news for investors.

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