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Letter to the Editor
This article originally appeared in the June 2001 Issue of INSIGHT
A Long Overdue Rebound?
April and the first part of May have been very good to the stock market. As this is being written on the eighteenth of May, the Dow Jones is well over 11,000 and back to the level of October of last year.
High tech stocks continue to suffer and probably will continue in this vain for some time. With the exception of many of the dot-coms, these companies are sound and will show improvement in sales and earnings over the long haul. The problem is that the price many of the stocks got totally out of balance in terms of their earnings.
Earnings are the most important factor when looking at most stocks related to the collision repair industry. Let’s take a look at Keystone Automotive for example - with the State Farm decision, Keystone’s sales were hit hard, down over 25 percent when it came to crash parts. At the same time, earnings were hit much harder, almost three times so in fact. Keystone was unable to cut its costs to match this drop in sales. Recently their stock has been selling at a 40+ multiple of earnings in an automotive aftermarket industry, where stocks typically sell at 15 times earnings or less.
Keystone has addressed its cost issues while at the same time has seen a resurgence in sales with March sales rising to the levels of pre-State Farm days.
Although the Allstate acquisition of Sterling will initially have only a small impact on aftermarket parts sales, it could have a profound impact if it moves ahead with its apparent plan to operate 300 shops, each averaging over $5 million in sales over the next few years. Allstate has not pulled back from using these parts as other insurers have.
Looking at some of the other collision industry related stocks, we see that our old friend Drivershield.com is up over 75 percent on a YTD basis. The issue with this company continues to be its potential de-listing by NASDAQ, which would, in our opinion, have a major downward impact on the price of the stock.
Other winners on a YTD basis include AutoNation, which still falls below its 1997 high of almost $40. However, it has recovered from its low of $4.62 earlier this year. Although not openly recognized, AutoNation is the largest operator of collision repair facilities in the United States, with shops in over 100 dealerships. While the number of dealers with body shops has dropped, the volume of busiess in the remaining shops has risen. Dealership body shop sales have grown at a compounded level of 8 percent. This provides a real growth of 3 percent in an industry where growth has typically been tied to inflation.
All of our insurance stocks remain down on a YTD basis, with the exception of Progressive, which after the close of price per our stock report on the fifteenth has risen over $24 to a new high of just over $130. This reflects an extremely competitive market for policies and at the same time a significant increase in both claims and severity.
-Charles Baker-
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