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Letter to the Editor
This article originally appeared in the August 2000 Issue of INSIGHT
Under the Microscope
Examining a Leader in the Aftermarket World
How does Keystone stand up to the scrutiny?
This month INSIGHT introduces yet another new series of articles, this time focused on an in-depth "under the microscope" examination of publicly held companies where business relates to collision repair.
This month the focus is on Keystone Automotive, the country’s leading supplier of aftermarket crash-related parts and supplies to the repair industry.
Key product areas covered by Keystone include replacement automotive body parts (crash parts plus radiators, etc.), bumper covers and facias, rechrome bumpers, refinish materials and supplies, cooling system components, remanufactured alloy wheels, and glass and miscellaneous products.
Chart 1 shows the percentage of total fiscal 2000 sales volume of $372 million for each of these categories as compared to fiscal 1995. While the percentage of sales for body parts from 1995 to 2000 remains about the same, the mix of body parts, according to Charlie Hogarty, Keystone’s president, has changed dramatically, with a shift away from Taiwanese sheet metal (now less than 20 percent of parts purchases) to crash-related parts such as radiators, A/C condensers, and other crash-related U.S. manufactured parts.
Keystone is rolling out its own private brand for these parts, called The Platinum Plus Program, which puts the Keystone label on each part in addition to the part identification of the producer. Platinum Plus starts with radiators, moving to remanufactured wheels, then to selected sheet metal parts toward the end of this year. By putting its own brand on these parts Keystone is hoping that insurers will have confidence in the quality of the parts and will again start specifying aftermarket parts.
How soon, or even whether this will happen is to a large extent dependent on State Farm’s appeal of the judgment placed against it in the class action suit in Illinois. If State Farm should lose at all levels in its appeals, the market for aftermarket crash parts will, in our opinion, remain at its present reduced level, with the demand tied to wreck rebuilders, fleets, customer-pay, and specification by a limited number of insurers.
If this should happen, Keystone’s future growth will have to come from the further expansion of product lines such as refinish materials, cooling/heating, wheels, and perhaps a move into other related areas such as tools and equipment.
Keystone very recently did a deal with Copart, the salvage auction house, to provide access to its parts to rebuilders through Copart at the time a vehicle is auctioned. This will soon tie in to Copart’s Internet auction sales as well as to sales at Copart’s 76 auction sites around the country. Each of these sites is now being equipped with an on-site computer kiosk tied in directly to Keystone so that parts orders can be entered at the time of the auction.
Overall Keystone’s customer base has expanded from the 13,400 reported body shop accounts when Keystone went public in 1994 to over 25,000 in early 2000.
With all the good news about line expansion and more locations and more customers, the stock should have been going up in value. Unfortunately, the State Farm case has impacted sales, and the value of Keystone stock is now at the $6+ level, down from an all-time high in 1999 of $28+ prior to the State Farm decision.
To help bolster the stock price, Keystone announced a stock repurchase plan of up to $10 million, of which $4.5 million has already been completed. Unfortunately the stock continued to drop after the repurchases, and the average repurchase price was $13+ as compared to today’s $6+ valuation.
Keystone’s financials are healthy. For example, its overall Gross Profit Margin is 43 percent, as compared to another industry supplier, FinishMaster, where the reported GPM is a more modest 34 percent.
Keystone’s balance sheet is strong and cash flow is positive, bolstered by some non-recurring "expense reserves," which, while they reduce earnings shown on the income statement, are in fact "reserves" and have no adverse effect on cash flow, much as depreciation and amortization of intangibles.
It is this writer’s opinion both as a Keystone stockholder and industry observer that Keystone stock, at a less than 7x multiple of earnings could prove to be a worthwhile investment at its present depressed price.
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