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Letter to the Editor
This article originally appeared in the October 2000 Issue of INSIGHT
October 2000 Investment Update
So far, we have seen no evidence that reported lower earnings are having an impact on the blood-letting competitive activities in the marketplace as each of these companies fights for an increased share of market. I believe this is in an almost flat year-to-date market for refinish in dollar sales.
I sense there may be a shift in strategy coming as suppliers like PPG, Sherwin-Williams, and DuPont expand and strengthen body shop programs aimed at achieving loyalty by aiding the shop in both expanding their sales volume and profitability. This has been most effectively done with the shop in key marketing and financial areas in addition to refinish issues.
It is my belief that these programs will prove more beneficial than deep discounts and upfront cash in assuring both the viability of the shop and the supplier’s position.
The only real winners in stock value year-to-date have been the insurers, who have benefited from an overall rally in financial related stocks. I believe that insurers, however, are experiencing higher claim costs this year, both in severity and overall claims volume. The combined ratio of several insurers has gone up and, in some cases, is now over a hundred percent. This means operating expenses and claim costs are exceeding policy related revenues.
Insurers historically have relied in large measure on investment income to show an overall profit, but this has been tough to achieve this year. Watch for increasing pressure to reduce claims costs at the repairer level.
Our feature this month on salvage addresses one aspect of potential cost reduction as insurers, data providers, and salvage operators introduce new programs to expand the use of recycled parts.
While today Ford is the only OE manufacturer with a direct involvement in the recycling industry with their Greenleaf operations, I have to believe that General Motors and, perhaps DaimlerChrysler are not far behind. The combination of threatened legislation requiring OEs to provide expanded recycling, coupled with the inherent economies of recycling for repair makes this an attractive option for OEs.
Perhaps OEs and recycling consolidators such as LKQ (part of the Huizenga empire), can bring to the industry a uniformity of quality definition and improved availability that will make recycled parts, both mechanical and crash-related, more attractive.
Incidentally, here’s an update on last month’s Under the Microscope, about the salvage auction arena. It is interesting that Copart has reported its best quarter ever, when at the same time Insurance Auto Auctions stock price has dropped.
Do I have any specific investment advice for this month? Yes. As the troops were told during the Revolutionary War, "Keep your powder dry!" Take that to mean that, in my opinion, it continues to be prudent to reduce your overall stock holdings. In that vein, take a look at the government’s I Bond Program, in which the interest paid is a combination of a fixed rate plus a variable rate indexed to inflation. Currently these bonds are paying around 7.5 percent and the interest is exempt from some taxes. Check these out; they’re available at any major bank.
-Charles Baker-
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