By Jeff Sanford
Toronto, Ontario — October 19, 2015 — Publicly traded companies in the collision repair space are getting ready to announce results for the third quarter of 2015. Let’s hope the results are better than stocks in the wider market. The earnings haven’t been good at some major consumer-based companies. Many assumed that this year the consumer economy would finally recover five years after the Great Recession, but that recovery doesn’t seem to be emerging as many expected. Wal-Mart stock lost 20 percent of its value last week after the company reported that its earnings will suffer in the years to come. But as the auto industry continues its strong business here in 2015 the publicly-traded companies in the collision repair sector continue to do well. Some notes on the coming Q3 earnings season:
– Boyd Group Income Fund continues to push out profit. The company just announced a cash distribution for the month of October 2015 of $0.041 per trust unit. The distribution will be payable on November 26, 2015 to unitholders of record at the close of business on October 31, 2015.
Boyd Group has acquired five new facilities in the last month, bringing on two facilities in Ohio and three in Colorado. All of the new facilities operate under the Gerber Collision & Glass name.
– LKQ Corporation is the subject of a very positive report from US-based investment bank William Blair & Company. The lead analyst on the report, Nate Brochmann, suggests that while “headwinds persist,” there is a positive outlook on the parts supplier for the next several years.
LKQ releases its third-quarter results on Thursday, October 29. The William Blair analysts think there may be some impact on earnings as a result of foreign exchange shifts (the American dollar is high, reducing the value of exported productions). As well, scrap steel prices are relatively low, reducing the income from scrapped cars sold to smelters. But according to the report, “[we] believe underlying trends are positive and we expect the company’s core parts and service business to perform well, with healthy organic growth.” Brochmann did lower the estimates of third-quarter earnings-per-share by $0.02, to $0.34. But this is inline with other analysts following the stock. He is still forecasting a profit.
Getting deeper into the story at LKQ, the report points out that the number of miles North Americans are driving has been increasing, and that’s good for collision repair shops. According to surveys the brokerage has carried out, “auto body shops have indicated activity has been steady to slightly better over the past few months.” So businesses in the sector seem to be doing well. The increase in “miles driven” is creating a tailwind for the company, as is an increase in “parts per repair” and more “fully insured newer cars” on the road. These factors should help the company sustain solid organic revenue growth over the near term.
According to Brochmann, although the current bump in auto sales will not benefit LKQ, the strong sales now are setting the company up for growth down the road. “The [increase in sales and miles driven] may not drive results immediately, but it should help in the long term as the cars enter the company’s sweet spot for alternative parts demand (about three to nine years old). These new cars tend to have a higher cost per part, are fully insured, and have more parts per car. The average parts per estimate is now 9.1 parts, which is up from 7.9 parts five years ago,” according to the report. Another driver of growth at LKQ: Electronic ordering systems. “We believe as electronic ordering systems take hold that LKQ should benefit via market share gains. This will likely be a gradual transition supported by auto body repair shop consolidation and/or a generational shift, but results thus far have been positive,” according to Brochmann.
On the subject of scrap steel prices, the report notes prices decreased about 10 percent during the third quarter. “This will have a negative impact on gross margin because of the timing of buying cars at auction and selling them for scrap about 90 days later … on the company’s second-quarter call in July, management estimated that the impact from scrap prices on third-quarter EPS would be about $0.01. We believe the actual impact will likely be closer to $0.03 as prices declined roughly 21 percent from July to September. It should be noted that scrap steel continues to become a smaller portion of LKQ’s revenue mix (16 percent of 2011 total revenue versus 10 percent of 2014 revenue), which should gradually reduce the company’s exposure to volatile scrap prices,” according to the report.
Brochmann expects third-quarter revenue to increase 8 percent to over $1.8 billion. The investment bank rates the stock, “Outperform Aggressive Growth.” The long-term forecast for growth in earnings-per-share at LKQ is 25 percent.
– Software provider Solera, parent company of Audatex, recently enjoyed the bump in share price that often attends an acquisition. You can read more about the acquisition by Vista Equity here. But now that the company has been sold a couple of brokerages have downgraded the stock.
Shares in Solera Holdings have dropped 0.02 percent during the past week, but the last four weeks taken together show overall positive gains of 0.61 percent. Solera has also disclosed that Tony Aquila, CEO of Solera Holdings, sold 21,000 shares in the company on March 12, 2015. Currently, company insiders own 2.4 percent of shares, with institutional investors owning 99.65 percent. Institutional investors are large organizations, such as banks, pension funds, labour unions, etc., that make substantial stock investments.