News of Moderna’s upcoming COVID-19 vaccine poured more fuel to an already lit stock market after similar reports from Pfizer in the past week. Most companies negatively impacted by the pandemic saw their stock prices gain as investor hopes of a return to pre-pandemic normalcy increase. However, this doesn’t fully explain the 16.4% rally in Uni-Select (TSX:UNS) stock on Monday.
Uni-Select’s business pulled off a strong recovery during the third quarter ended September 30, 2020. Moreover, management efforts helped turn around the company’s ailing fortunes. UNS clearly performed much better than expected during a global pandemic that ravaged its customer base this year.
Uni-Select on strong COVID-19 recovery momentum
Uni-Select is a leader in the distribution of automotive refinish and industrial coatings in Canada and the U.S. with a strong presence in the United Kingdom’s automotive aftermarket parts distribution market.
A 16.4% surge in UNS stock price shouldn’t come as a surprise to investors given how the company fared financially during the third quarter.
The company released a strong set of third-quarter financial results on Friday, which showed impressive revenue recovery, massive cost savings, and effective cash management. Debt repayments and strong free cash flow generation de-leveraged the business and set it for better success in a post-pandemic world. Investors in UNS stock have every reason to reward the company with a rising share price right now.
A surprisingly good third quarter
UNS suffered a 31.9% decline in sales revenue during the second quarter of 2020. This was due to the COVID-19 pandemic. However, the company saw sequential month-over-month improvements in sales activity between April and September. Third-quarter sales improved significantly over the second quarter. Revenue at $395 million was only 12% lower than comparable sales during the same period last year.
The best performance was reported in its Canadian Automotive Group segment. Canada sales fully recovered to pre-pandemic levels with a 0.2% organic growth despite COVID-19. Organic growth was a negative 18% in this segment during the second quarter. The U.S. and the U.K. segments also improved, though revenue remained 24.1% lower in the U.S. and 3.2% weaker in the U.K. Things were much worse during the second quarter.
Notably, the company’s gross margins and operating margins improved during the third quarter. Actually, the third-quarter operating margin at 4.5% was so close to the 4.7% margin recorded during the same period last year.
A quick return to profitability
Most noteworthy, the company returned to profitably in a strong way during the past quarter. Uni-Select posted its first positive net income in four consecutive quarters. Net income was $4.5 million for the quarter. Adjusted net income at $7.5 million was 30% shy of the $10.7 million in adjusted net income for the third quarter of 2019 — the last time UNS stock investors had seen a positive bottom line at this firm. Even better, the quarterly return on assets at 3.3% was the best ever seen in eight consecutive quarters.
To add more, UNS’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin recovered to pre-pandemic levels of 8.4% during the past quarter thanks to sales recovery and cost management efforts.
Any further cost savings within the business should mean better profitability for the company going forward. This is the good news Uni-Select stock investors look out for.
Welcome improvements in financial health
I noted management’s strong execution earlier. Executives’ efforts really paid off during the past quarter. The company announced a Continuous Improvement Plan in June that targeted annualized cost savings of $28 million to $30 million. The plan was fully implemented in the U.K. and Canada and is underway in the U.S. segment, yet cost savings were at $30 million already by September this year.
The CIP involved integrations of owned stores, workforce reductions, and cuts to discretionary spending.
Further, Uni-Select generated a record $33.4 million in free cash flow after cost rationalization measures and tactical cash management during the quarter. Management paid down about $84 million in debt to reduce leverage. This should mean better liquidity and improved solvency for the business going forward.
Investors expect the company to perform better in a post-COVID-19 era after the strategic reset, even before an orderly Brexit. Hence the strong surge in UNS stock recently. Reports on potentially successful COVID-19 vaccine candidates add momentum to Uni-Select stock’s recovery going forward.
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Fool contributor Brian Paradza has no position in any of the stocks mentioned.