The auto sector has expanded tremendously in recent years. Auto manufacturers from General Motors to Toyota Motor Corp. are watching their sales numbers break records every quarter. With all those new cars hitting the roads, there will be an almost equivalent supply of used autos for sale.
Anybody who owns a used car knows we have to set some money aside for repairs. So how can we investors benefit from the myriad of parts being replaced? The answer might lie in Uni-Select (TSX: UNS) — a replacement parts manufacturer headquartered in Quebec — that might be turning the corner after a couple of rough years.
The good
After three years of decline, the company has finally seen growth in earnings per share. The fall was significant; from $2.64 per share in net income in 2011 decreasing to $1.06 in 2013. With such a drastic drop in profitability, management took it upon themselves to reorganize the company and perform a massive cost reduction plan in order to renew with profitable growth.
It seems the cost reduction program is starting to show results. For the first quarter of 2014, the net income came in at $8.9 million, much better than the $6.5 million in 2013. With the sector in full expansion, if Uni-Select can keep costs under control, any increment in sales will be reflected in a higher percentage on the net income.
The bad
Uni-Select is not alone in this industry; it is one of the smallest with a market capitalization of only $600 million. AutoZone (NYSE: AZO) and Genuine Parts (NYSE: GPC) are much bigger with $17.45 billion and $13.46 billion, respectively, and as such benefit from stronger economies of scale.
These two competitors, unlike Uni-Select, did not have a restructuring phase in the last couple of years. They are fully benefiting from the automobile bull market and their distribution capabilities keep on increasing. This is bad news for Uni-Select because being the smallest player in an industry where economies of scale are crucial isn’t the optimal position. However, AutoZone and Genuine Parts generate sales predominantly in the United States, while Uni-Select is mainly a Canadian retailer.
The ugly
Uni-Select is faced with significant debt on its balance sheet. The company has $436 million in debt as of the last quarter with a market cap of only $600 million. Now the majority of that debt is long term, but it still faces the pressure of mounting interest expense.
Its earnings before interest and taxes divided by total interest expense ratio was 3.62 last quarter. While manageable for the moment, thanks to increasing sales and cost reduction, any problem on any of those aspects could force the company into a very precarious liquidity situation in the future.
Cause for optimism
While the case can be made that Uni-Select is a bad company to invest in, recent results warrant a deeper look into this company’s future. With only $600 million of market capitalization in a very fragmented sector, there is more room for growth and optimism.
