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Letter to the Editor
This article originally appeared in the January 2007 Issue of INSIGHT
A Mixed Year
Well, here it is - the end of the year. It has been a mixed year with some of our industry related stocks up, and others down.
Probably the biggest winner this year in increase in stock value has been Sherwin-Williams Co. which shows 44 percent growth value of the stock since January, and an increase in dollar value of the stock of approximately $20.
Just how much automotive refinish sales at Sherwin-Williams have impacted this substantial increase in stock value is open to question. While sales dollars are up slightly, it is not clear whether this has been primarily a result of price increases during the year. All in all, however, Sherwin-Williams management has done an outstanding job in increasing overall sales and in value building of their stock.
Other companies showing outstanding increases in the value of their stock include Akzo Nobel, CarMax, LKQ, Snap-on Tools, and both Sonic Automotive and United Auto Group, chains of OE dealerships.
On the insurance side of the collision repair business, we see both Allstate and St. Paul Travelers showing almost 20 percent increases in the value of their stock, and it would appear that Allstate, with a current PE ratio of nine, may be an excellent candidate for stock appreciation in 2007.
On the foreign side, we continue to see the Boyd Group, slowing its slide in value. Boyd is down for the year proximately 42 percent. However, there was a modest increase in share value last month of $0.15 Canadian. Whether this indicates a potential turnaround is too soon to know.
As we look into 2007, frankly there will be very little to cheer about in our estimation, regarding collision repair related businesses. The number of paid claims resulting in collision repair continues to drop and the number of vehicles being totaled, which precludes the repair process and thus collision repair sales, continues to increase. In most areas the percentage of totaled vehicles is running about 20 percent of paid claims. This is up from approximately 12 percent just three or four years ago.
Another factor affecting collision repairs is the continuing march by most insurers to reduce our least controlled repair costs, both through demanding discounts on parts and labor and placing tighter controls on use of parts versus labor in the repair process. It is worth considering that the use of a new OE repair part may result in a higher-quality repair, versus repair of an existing panel, which may well include grinding off both Ecoat and galvanizing, a procedure potentially contributing to future corrosion problems.
Further comment on the parts issue has to include a reference to Keystone's loss in the patent suit regarding Ford parts. Undoubtedly Keystone will appeal. In the meantime, OE vehicle manufacturers will move rapidly to obtain design patents on hundreds of parts to be used on 2008 and future vehicles.
It is my belief that many insurers will be hesitant to expand their specification of non-OE parts. In 2007 OE manufacturers will react to the introduction of parts that they have patented, and will also move to provide insurers with some lower-cost options for OE parts, including blemished parts and dealer returns. These parts are being priced at a level equal to or below that of aftermarket parts further discouraging insurers from expanding their use of non OE, sheet metal and plastic components.
As I have done each December for the past ten or more years, I will stick my neck out and say that I believe the following stocks will outpace the majority of collision related stocks in the New Year. Winners for 2007 I believe will include Akzo Nobel, BASF, Sherwin-Williams, United Auto Group, Allstate, and Safeco. I feel that the majority of the other stocks that we follow on a monthly basis will hold fairly close to level throughout the year, and the only stocks which may show some dramatic drop would be eAutoClaims, AutoNation, and perhaps Progressive, which showed a 17 percent drop in 2006.
-Charles Baker-
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