By Jeff Sanford
Toronto, Ontario -- August 20, 2015 -- Boyd Group Income Fund announced its latest numbers this week. Analysts were so impressed with the results they tripped over each other in a rush to boost their price targets.
Boyd Group, of course, is the largest corporate-owned multi-location operator (MSO) in North America. The company has taken a share of the $40 billion North American collision repair industry through acquisitions of 38 Canadian locations and 292 US-based outlets. Boyd operates two core brands along with an auto glass repair referral network. The company services both commercial and individual vehicle owners and focuses heavily on insurance repair claims.
In the wake of the latest earnings release the analysts following the company were quick to boost the price targets they assign to the company’s units (the price targets are recommendations for stock-trading clients of the banks the analysts work for). These estimates of future price are based on analysis of business and trends. The latest numbers from Boyd are feeding and fueling a solid, optimistic outlook on the prospects for Boyd.
Analysts at National Bank Financial released a commentary on the Q2 numbers. Some of the points lead analyst Trevor Johnston made to clients:
- higher than expected tax payments at Boyd were “not a concern”
- financial results were ahead of the Street’s earnings forecasts.
- same-store sales of 4.7 percent suggest that Boyd is “stealing market share” from competitors.
- seasonally strong glass sales were ahead of the banks forecast of $42 million in sales.
- management at Boyd indicated in the conference call accompanying the release that the MSO acquisition market remains constrained due to “lofty vendor expectations.” That said, Boyd is “continuing to track its targeted annual single-store additions of 19-32, adding 10 stores year-to-date, in addition to Craftmaster’s six.”
- Boyd has over $65 million in cash on the balance sheet and another $300 million in available credit. That is, the organization is well-positioned to continue financing its growth through acquisitions.
- “Operationally Boyd is performing the best we have seen,” wrote Johnston. “It has one of the best balance sheets in the diversified universe and despite the MSO slowdown still provides an above-average growth opportunity to investors. We reiterate an ‘outperform’ rating.” (Analysts typically assign a rating, from ‘sell’, ‘hold’, ‘buy’ or ‘outperform’ to a stock as a way of indicating what way they think the stock will move.)
Laurentian Bank analyst Glen Michael also released a note on Monday. According to Michael, he liked that “margins surprised on the upside.” He also thinks the company has “lots of dry powder available” to make more acquisitions. He also raised his target price for the stock to $70 from $60. Units in the Boyd Group are currently trading about $58 a share, so the suggestion is that there is good upside in the stock yet.
Some of Michael’s notes:
- Q2 total sales rose 37.4 percent compared to the same period last year. Revenue expanded to $278.7M from $202.8M. This was ahead of the $274.9M forecast by Michael.
- U.S. operations, which make up 93 percent of sales, came in better than expected with revenue of $258.1 million versus a forecast of $254.5 million.
-U.S. same store sales came rose 4.9 percent, which was ahead of a forecast of 3.5 percent.
The strong increase in “same store sales” is very interesting. Analysts use a variety of different measures to analyze the performances of companies. One common statistic used in the retail sector is “same store sales growth”, or SSSG. This number (expressed as a percentage) compares revenues earned in an established outlet to previous periods at the same outlet. By comparing the sales in one store to previous time periods an analyst can determine what portion of new sales are coming from growth in sales and what are coming from the opening of new stores in the chain.
This is an important stat. If the growth in a company’s revenue is only coming from the acquisition of new stories and sales at existing stores are flat, the company is not as strong as a company that is increasing sales through both acquisitions and expansion of growth in individual stores. Boyd, it seems, is doing both.
Once an acquisition boom ends—and they always do as potential acquisition targets dwindle—growth from acquisitions dries up as a market becomes saturated. But if a company is also growing sales at individual stores the suggestion is that the company is taking local market share through improved operations at its stores.
According to Michael, “Unlike 2014 when same store sales growth was affected by weather, the Q2 strength was less weather-related, and more indicative of market share gains.” That is, although Boyd is executing an acquisition strategy it is also expanding sales within its stores. This should not be a surprise.
Boyd spent 18 months and 35 million on a consultant to come up with what it calls its WOW program, a plan to boost customer satisfaction and lower cycle time. A recent media report suggests the company managed to cut its cycle time down to seven days in a pilot 2014 launch.” About 30 percent of the company’s locations had been “certified” under the WOW program. “The process includes better scheduling of vehicle intake, a more thorough assessment of repair needs and mirroring of parts, and scheduling a committed output date,” a Raymond James analyst wrote recently.
These analysts went on to note that, previously, “several days were lost due to wait times between when a customer dropped off his car to when technicians commenced repairs, between when repairs were completed to customer pick-up, and while parts were on order.” The WOW program is collapsing these times. Today, the collision repair industry as a whole averaged 10.5- to 12-day cycle times. So Boyd is doing well on this key metric. Which is also good. During an earninigs calls last year the company’s CEO suggested analysts not focus to closely on WOW, as Boyd seemed to lose a bit of ground in terms of implementation of the program.
In November 2014 the CEO of Boyd, Brock Bulbuck suggested that, “To date, the largest obstacle has been employee adoption with some experienced mechanics and operators (who historically operated quite independently) opposed to change and the imposition of a specified process.”
That is, some of the newly acquired stores were chafing at the new processes Boyd brings in post-acquisition. But the company has been diligent in pressing the changes. After all, the point of consolidating smaller shops into a larger chain is to reap the economies of scale that come with a consolidated, centralized approach to management. Buying out owners at high multiples isn’t profitable unless each individual shop can be made to operate more efficiently. So the fact that there is a boost in SSSG numbers this quarter suggests the WOW program is working, good news for unitholders of Boyd.
The Laurentian analyst, Michael, pointed out that management spent more time talking about the WOW program on this call. Sure, continued mergers and acquisitions of new stories contributed $48 million to top-line growth, but improving same store results are beginning to take on more importance. And no wonder. Michael also mentions in his note that the “M&A market continues to get more competitive.”
During the Q1 conference call management made reference to the possibility of an evolved M&A strategy as competition for larger MSO deals continue to escalate, pushing up multiples. (Fix Auto recently did a deal with the Caisse de depot et placement, a Quebec pension fund, that gives Fix Auto money to do acquisitions, while the Ontario Municipal Employers Retirement System is working on a consolidation strategy with Calibre.)
So there is now competition in the consolidation game. With more buyers looking for stories it’s no wonder that, according to Michael, Boyd is looking to evolve its strategy. Explicit details have not been provided as to a reformatted M&A strategy. But there are three possible areas where Boyd could make changes to its M&A strategy according to Michael:
- Increase the +6-10 percent single store-growth target.
- pursue a strategic partnership with a dealership group (dealers represent 22 percent of the collision repair market).
- acquire a franchisor (which could rapidly increase the push for national coverage).
That said, Michael thinks the outlook for Boyd is good and is maintaining a "buy" rating on the stock while increasing his price target to $70 a share.
Some of the other investment banks that cover Boyd and that upgraded their price target Monday include:
- Raymond James, which increased its price target from $60 to $68.
- LB Securities, which increased its price target from $60 to C$70 and gave the company a "buy" rating.
- CIBC increased its price target from $66 to C$72 and gave the stock a sector outperformer rating.
- Scotiabank raised its target price from $58 to $59. and gave the stock an outperform rating back in May.
Six analysts have rated the stock with a "buy" rating. The stock currently has a consensus rating of Buy and a consensus target price of C$69.67.
In other good news, Director Sally Ann Savoia bought 1,700 shares of the firm’s stock in a transaction that occurred Friday, June 5. The stock was bought at an average cost of C$54.00 per share, for a total transaction of $91,800.00. When insiders buy stock in the companies they work for it is typically considered a good thing. Insiders have the best view of a company’s prospects. So purchases of stock by insiders is generally considered a good thing.
For more information, please visit boydgroup.com.