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Letter to the Editor
This article originally appeared in the December 2001 Issue of INSIGHT
Forecast Flat; Severity Watch in Effect
As we approach the end of the year it is time to review some of our key stocks. For example, one of the few public companies deriving its entire sales and profits from the Collision Repair Industry is Keystone Automotive.
Keystone's stock started out the year at just under $7, down from a previous year high of over $20 and a low of under $5 after the State Farm decision. The stock has now rebounded to just under $16, based on a sales and profit rebound to pre-State Farm days.
While Keystone's sheet metal sales have largely bounced back, it is our understanding that sales of plastic components such as fascias and lights have come back the most, while major increases in sales of crash-related parts, such as radiators, wheels, and refinish materials have been the major impetus to increased sales.
Key insurers such as Allstate, Nationwide, Farmers, and USAA have fine-tuned their DRP procedures to require the use of aftermarket parts (primarily CAPA-certified) when possible.
FinishMaster is another public company where sales are almost totally tied to the Collision Repair Industry. In 1998, FinishMaster stock dropped to an all-time low of just over $4, and its margins had also slipped to all-time lows.
In 2001, FinishMaster appears to have turned the corner, and while sales for the third quarter and YTD were lower than 2000, gross and net profits were up. Gross margin in the third quarter increased $0.1 million, or 0.4 percent and $0.9 million, or 0.9 percent for the nine months ended September 30, 2001 compared to the prior year periods.
Strong gross margin as a percentage of net sales more than offset the negative impact of lower net sales volume. Gross margin as a percentage of net sales increased 100 basis points to 37.7percent.
According to FinishMaster's 10Q, filed with the SEC in November, the improvement in margin as a percentage of net sales is primarily the result of large inventory purchases in late 2000 made prior to manufacturers' price increases, supplier purchasing incentive programs, and improved inventory management procedures.
The 10Q also stated that factors leading to the softening in demand include slower overall economic conditions; continued productivity improvements in the use of automotive paint by customers; flat to declining number of automobiles being repaired; and changes in vendor supported marketing programs used to attract and retain customers.
Wonder of wonders! Drivers-shield.com's stock is up from a low at the beginning of the year of $0.40 to $1.60, still below its 1998 high of $6, but not bad for a company that just reported a 9 percent drop in sales for the quarter, while showing a minus 10.46 percent return on equity.
Never mind that sales are down and profits are non-existent - Driversshield's president, Barry Siegel, forecasts that the present reported annualized sales level of approximately $15 million will rise to an estimated $50 million in 2002. Mind you this is primarily the full value of collision repair assignments handled by Driversshield, not the 12 percent or so that they receive for handling the claims.
On the auto insurance side, we report one company up sharply for the year, one down, and one flat.
The upside company, Progressive, has in the past year launched aggressive sales and marketing programs aimed directly at State Farm and Allstate. These programs have resulted in new policyholder sales, and the incremental value has resulted in improved profitability.
Allstate stock is down from a high during 2001 of over $45, and I believe it is a combination of relatively flat sales, e.g. up YTD 5.4 percent over 2000, and increased claims costs, that have pushed Allstate's combined ratio over 100 to 103 compared to 98 for the third quarter of 2000.
This shift in combined ratio to 103, meaning that in Auto, for every dollar taken in $1.03 is spent, has resulted in Allstate's tougher attitude toward repairs in an effort to hold down claims costs.
Last year, improved cycle time were the buzzwords. This year, it is severity, and the push is on to lower claims costs. This falls directly on repairers, who are being asked to use more aftermarket parts and salvage when "repairs" are neither possible nor economical.
As we move into 2002, I think we will see a relatively flat Collision Repair Industry, even though sales of new cars have remained strong. Key factors in calling for a flat forecast are: more totals as a percentage of claims, lower accident frequency, and the decision on the part of some insureds to "take the check" and not have the vehicle repaired.
-Charles Baker-
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