Uni Select Inc. (TSX: UNS) shares declined over 10% yesterday after the company released first-quarter results that were below expectations. Total sales increased 12.6% to $297.2 million, driven by acquisitions. Organic growth was disappointing, however, with an almost 5% decline.
So, the stock was down today on much higher than normal volume, as investors reacted to this report, digesting what this means and if it changes the investment thesis on the company. This follows a period when the stock soared to 52-week highs.
Here are the key points related to the quarter that serve to keep it in perspective.
Underlying organic growth
The reason that the Canadian Automotive Group, which accounts for 33% of sales, reported a decline in organic sales was due to the loss of one independent member in the quarter. Without this loss, the group actually experienced underlying organic growth to the tune of 3.4%. This is quite healthy and follows fourth-quarter 2016 organic sales growth of 1%. And while this loss will affect results for the rest of the year, it does not appear to be indicative of a bigger problem, so there is no reason to believe that more members will leave the network.
Overall organic growth would have been positive excluding this one-time occurrence as well as the product changeover that is taking place at FinishMaster U.S.
Dividend was increased
The quarterly dividend was increased 8.8% to $0.0925, and the dividend yield now stands at 1.15%.
Strong cash flow generation
In the quarter, the company reported $22.2 million in free cash flow, an increase of 14% versus the same period last year. Free cash flow as a percentage of revenue was 7.5%, signifying the company’s strong ability to convert sales into cash flow.
Balance sheet strength
The company’s balance sheet remains strong, although debt was increased this quarter. The debt-to-capitalization ratio now stands at 30% versus 22% last year, as the company took on additional debt primarily to fund acquisitions. The total-debt-to-EBITDA ratio is a comfortable 1.82 times, and the company has $208 million of unused credit facilities to fund future growth.
In summary, despite the slowdown in organic growth this quarter, the company has grown by continuing to be a consolidator in the auto parts aftermarket as well as the automotive paint market. And the company generated strong cash flows, which is the cornerstone of a business. In my view, it looks like this sell-off is overdone, and investors should keep their eyes on long-term fundamentals, which look good for the company.
Going forward, organic growth looks to be recovering in the Canadian automotive aftermarket and in the U.S., the company sees opportunity in the very fragmented industrial coatings market, where the company currently has $70 million in sales, and the market is over $4 billion in sales.
