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Letter to the Editor
This article originally appeared in the November, 1999 Issue of INSIGHT
November 1999 Investment Update
A fear on the part of the investment community of higher interest rates is certainly part of the problem. Insurers also are having a harder and harder time making a profit on both their underwriting and their investments.
This morning (October 18), Allstate stock sells for under half what it did less than a year ago, as does Progressive. Are these companies really worth only half as much? At a PE ratio of less than six in an industry that has historically had its stock priced at 10 to 15 times earnings, a case can be built that, even with an expected hit on earnings from Floyd, both Allstate’s and Progressive’s prices will show significant recovery by year end. Progressive, at a 14 PE ratio, however, may not have the bounce back that I think Allstate will enjoy.
Also as of this morning, First Priority Group continues to languish at under $1, waiting perhaps for more inspirational press releases relating to unnamed major new customers or planned stock repurchase programs.
Keystone stock, as might be expected, dropped almost 40 percent, no doubt primarily as a result of the State Farm case decision. At $9, Keystone has a PE ratio of well under 10 and a Year-to-Date growth rate of 25+ percent.
It is my best estimate, based on both conversations with Charlie Hogarty of Keystone and continuing research in the aftermarket parts arena, that Keystone sales of aftermarket sheet metal and bumper covers could be off as much as 10 to 15 percent for the fourth quarter, having a modest impact on overall earnings.
The State Farm decision should not impact Keystone sales of refinish materials, radiator/AC components, wheels, and remanufactured bumper covers, all of which we are told account for over 50 percent of Keystone sales.
While the market for insurer-specified aftermarket parts may dry up as more suits are files and insurers see their total cost savings disappear, the market with rebuilders, fleets, and lower end uninsured repairs will probably not be impacted to any great extent.
If Keystone ends up with 1999 earnings of $1.50 or more as expected, the stock should command an industry overall PE ratio of 11+.
While the collision repair industry is a small part of their business, ADP truly does show as a star among all of the stocks we follow on this page. Month after month, year after year, this stock just modestly climbs. While only up 10 percent YTD, its consistent performance says that it is a stock to have in your portfolio. It is just a bit scary to see it at a PE ratio of 40+, but then it has traded at this kind of ratio for a long, long time. Perhaps the high PE ratio cannot be retained. Only time will tell.
While the auto makers are all having a record year for sales and profits, it is interesting to note that the Dow Jones U.S. Auto Parts and Equipment Index is off by 17+ percent, down more than our Collision Repair Supplier Index, off by over 12 percent, and our INSIGHT Fund Index, which is off by 11+ percent.
One might wonder whether if many of our industry participants added a .com to their corporate name it would improve their performance.
We will no longer track Hoechst and ICI in our Foreign Stocks section of this page, since they have both shed their ties to the collision repair industry.
-Charles Baker-
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