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Letter to the Editor
This article originally appeared in the February, 1999 Issue of INSIGHT
February 1999 Investment Update
So far this year the Market looks strong but extremely volatile, with the Internet stocks going up and up with no apparent earnings in sight for most of the high fliers.
We have added The Boyd Group of Winnipeg, Canada to our INSIGHT Fund for 1999. As our Industry Update Page details, Boyd has moved into the U.S. with the purchase of Service Collision Center, the largest multi-point collision repairer in Wichita, Kansas.
Boyd anticipates sales in 1999 of between $45 and $50 million Canadian, or, roughly, US$30 million. Boyd’s performance on the Winnipeg exchange has been flat over the past four months, but this may change with more acquisitions. Boyd’s market capitalization, based on roughly 8 million shares outstanding, is about $11 million Canadian or US$6.5 million. When we look at 1998 performance, it is our best estimate that the stock is selling at about 40 cents on the sales dollar, a level close to what many consolidators in the United States have paid for independents.
Consolidators here in the U.S., when talking future IPOs, are more attuned to a $2 or more per dollar of sales figure as a viable target. At 40 cents on the sales dollar, those shop owners here in the U.S. who sold out to a consolidator for stock plus cash could be unhappy campers when “their” consolidator goes public.
Bottom line, based on Boyd’s ability to achieve an average 46 percent overall gross profit, coupled with an aggressive management team: I think the stock is under-valued at the present time, and thus its addition to the INSIGHT Fund.
CCC Information Services is a newcomer to the INSIGHT Fund, too, and should prove interesting to follow.
While insurance stocks did rally a bit at the end of the year and in early January, disappointing earnings reports at mid-month have depressed all insurance stock prices, and the forecast for 1999 is for more price competition (Who says insurers never drop their rates?), and for increased pressure to control claims costs.
Most insurers in 1998 lost money or barely broke even on their underwriting, and achieved a 4 to 7 percent overall profit based on investment activity. Among insurers, we believe that Progressive and Citigroup (Travelers) will outperform Allstate, whose size makes it very, very difficult to increase market share. On this basis, only Citigroup and Progressive are included in the INSIGHT Fund 1999.
1999 will be an interesting year. I doubt that we will see the first significant consolidator IPO in 1999, based on what we believe will be most consolidators’ inability to increase same store sales significantly while at the same time improve operating gross profit margins in those same stores. Couple very modest same store sales growth with flat margins and a 5 to 7 percent corporate overhead, and you may not have a proposition to excite interest in an IPO. When there is evidence that consolidation can achieve cost advantages, other than reduced owners’ compensation and benefits, coupled with overall 15 to 20 percent same store sales growth, we will see a viable IPO entry.
-Charles Baker-
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