By Jeff Sanford
Toronto, Ontario -- May 15, 2018 -- In this week's Tuesday Ticker, AMA Group to spin out its collision repair operations, PPG warns 2017 results are in question, markets lag even as earnings remain strong and much, much more.
The first quarter earnings season has wrapped up. Strong business performance and the windfall from the Trump tax cut resulted in solid financial performance for companies throughout the economy. But as many investment professionals note, stock markets have not grown as strongly as one might have thought in the wake of such strong performance. Market indexes are sluggish. Through 2017 and very early 2018 markets were advancing so fast that they seemed to get ahead of themselves and so are now treading water even as financial performance of corporations is strong. The sluggishness may also be a result of worries that inflation will begin to pick up. Gasoline prices are high and rising, and that could affect economic performance over the months to come, and so investors are looking through the current strong earnings results to a possible slowing of the economy over the summer to come.
In Australia this past week AMA Group has just released, along with first quarter results, a proposal to spin off its collision repair business into a standalone company. It is no secret that Fix Auto has an eye on expansion in the highly distributed, unconsolidated Australian collision repair market. AMA seems to be getting ready to play a role in consolidating the Australian market. The proposal will see a ‘demerger’ of the AMA business. Blackstone Group will acquire what is called the Vehicle Panel Repair Business (the collision repair arm of the organization). Its automotive component, Accessory and Procurement Business (ACAD), will also be transformed into a standalone company. Current AMA Group shareholders will receive shares in the newly listed ACAD business on a one-for-one basis: AUS $0.86 in value for their shares in the demerged Panel Business. Investors can take either cash or a mix of cash and unlisted shares in the new collision company. AMA Group Directors have unanimously recommend shareholders vote in favour of both transactions. The collision repair business of AMA has been valued at $508 million. The rationale for the merger according to the proposal are to “allow each business to adopt a capital structure that is most appropriate for its scale, operations and strategic objectives. To enable the ACAD Business to gain access to new capital sources; for example, capital from investors that are attracted by the return profile of the business, which will, in turn, enable it to further exploit growth opportunities and to allow management of each business to focus on the core competencies of the separate businesses.” The demerger documents note that “the consumables and parts procurement function (‘Procurement Business’) of the panel repair business will become part of the ACAD Business, reflecting the true nature of the operation. This procurement capability has delivered significant cost savings for the Panel Business’s major customers, the auto insurance companies, and has in turn driven the rapid growth of the Panel Business. AMA considers that the potential to expand future revenue streams for the ACAD Business are promising and it is well positioned to benefit from global opportunities. In the event that the Panel Business is acquired under the Blackstone Proposal, the development of ACAD’s Procurement Business will be considerably de-risked and accelerated by a ten year product sourcing agency agreement between the ACAD Business and the Panel Business. Under this product sourcing agreement the Panel Business (after being acquired by Blackstone) intends to work with potential customers, including Blackstone Group portfolio companies, to develop mutually beneficial product supply arrangements. As part of the agreement, the Panel Business will guarantee the ACAD business AUS $12 million of product sourcing agency fees ($6 million in Year 1, $4 million in Year 2, and $2 million in Year 3).”
Major paint manufacturer, Axalta, is also showing interest in Australia. It has just announced a new Australian headquarters. The new HQ will be located in West Sydney. The new facility is scheduled to open in the first quarter of 2019.
On Thursday PPG Industries released a remarkable statement: According to the company it has fired its controller and has delayed filing its quarterly earnings report amid an internal investigation of accounting irregularities. The paint giant had recently announced some expenses had been improperly booked. Now, according to the Pittsburgh-based company, it has evidence that some of its employees had made improper accounting entries at the direction of the company’s now-former controller. As a result, PPG said its financial reports for 2017 “should no longer be relied upon.” Some employees have been reassigned after an internal investigation found evidence that improper accounting entries were made by certain employees at the direction of the former controller. The accounting misfire will result in a USD $7.8 million net decrease in income from continuing operations before taxes in the first quarter of this year. The company also warned that more accounting mistakes may be discovered. According to a report the mistakes go back to the first quarter of 2017. The accounting issues pertained to the improper reclassification of gains from income from discontinued operations, as well as income from continuing operations.
The effects of a fire at a key provider of lightweight metals spread from Ford to other OEMs over the past week. The fire at a Michigan auto parts supply factory caused Ford to temporarily lay off 7,600 workers as the plant that produces the F-Series pickup truck, the top-selling vehicle in America. But now General Motors has been forced to stop producing full-size vans at a factory in Missouri, and production of Fiat Chrysler's Pacifica minivan has been curtailed in Windsor, Ontario. The fire occurred at a supplier called Meridian Magnesium Products of America. Located near Lansing, Michigan the company makes structural parts out of lightweight metals. About one-third of the plant’s production goes to Ford. The OEM admitted last week that the shut-down will have a short-term impact on earnings, but the company has also said that full-year guidance of earnings per share of $1.45 to $1.70 will still be achieved. Relatively few companies are producing magnesium parts and so the fire has had a real impact on production. “There's a lot of demand for these light-weighting materials. Everybody needs it. Everybody wants it, and the supply chain isn't mature yet for this kind of volume,” said a source in one news report.
Tesla continues to suffer as the epic boom in its shares in 2017 reverses course. Shares are down from last year’s high as problems at the company’s new Model 3 factory continue to plague production. But shareholders had a different complaint this past week. A major pension fund advisor is urging clients to vote against three members up for re-election to the board of Tesla. CtW Investment Group is encouraging investors to vote down the re-election of Kimbal Musk, the brother of Tesla chief executive Elon Musk, venture capitalist Antonio Gracias and 21st Century Fox chief executive James Murdoch. According to CtW the nominees have little to no experience in the auto industry, and are bad choices to be on the board of a company that is facing some very serious financial consequences if the production problems around the Model 3 cannot be ironed out.
3M announced this week it will undertake share repurchases of USD $3.0 billion to $5.0 billion for 2018.