Now that earnings are wrapped up, we typically follow them up with a Value Call once we’ve had some time to review all the quarterly earnings and form opinions on stocks that may be trading at a discount.
First, let’s get into my portfolio moves this week.
My portfolio moves
It was a relatively simple week for me. I didn’t make any additions to the portfolio; the only sale I made was my Park Lawn position.
If you missed my email earlier in the week, Park Lawn is set to be acquired by a private equity firm for $26.50, an all-cash deal. Because I expect the deal to go through and no other suitors to come and step up the price, I moved on from my shares.
Park Lawn was a holding I had for 8+ years. I am sad to see it go, as I believe even at $26.50, the price is cheap. However, I do like the fact my aggressive additions in late 2023/early 2024 in the $17-18 range realized some solid profits in short order.
I am unsure what I will buy with the proceeds, but I will let you know when I decide.
June Value Call – Boyd Group Services (TSE:BYD)
Boyd is a company that has been featured here for quite some time. Some soft earnings over the last bit due to forces outside of its control have left it trading at what I feel are attractive valuations.
The company is a Canadian Dividend Aristocrat, having 17 straight years of dividend growth. If you’re an investor who prioritizes dividend growth, it’s a rock-solid option. However, for those seeking yield, the company’s miniscule 0.3% won’t do much.
How can a company like Boyd grow the dividend for 17 straight years and still only have a yield of 0.3%? That is primarily due to some rock-solid operations.
What Boyd does, and why there is still plenty of room for growth
Boyd is an autobody and glass manufacturer. I’m sure many people reading this will have no doubt heard the “Bring it to Boyd” jingle that often gets stuck in one’s head.
The company’s main focus is autobody repair, and its main growth strategy is acquisition. In Canada, it primarily operates under the Boyd name, but in the United States, it operates under Gerber Collision and Glass.
The business model is quite simple. Mainly, it works with insurance companies to repair vehicles after collisions. It does do individual work, but the bulk of its revenue is going to come from insurance companies, which makes the revenue stream relatively predictable.
The company is the largest of its kind, with over 950 locations across North America. However, despite its size, it has a miniscule market share. The industry has a total addressable market of $47.6B in the United States alone. Boyd’s revenue over the last twelve months totals $4B CAD, meaning despite being North America’s largest player, it controls a single-digit portion of market share.
Boyd’s main strategy is to open its own facilities and acquire “Mom-and-Pop” shops at reasonable prices. It then rebrands the acquisitions, fixes them up, and implements better operational procedures to improve the margins of the previous operations.
The end result has been an impressive 550% growth in free cash flow per share over the last decade despite the share count growing by over 45% over that time. As an acquisition-heavy company, it has been known to issue shares to fuel those acquisitions.
However, for the most part, it’s utilized those share issuances to access capital to acquire businesses that ultimately fuel bottom-line growth.
The reasoning for the drawdown over the last 6 months
Boyd is a rare company still undergoing multiple headwinds regarding the COVID-19 pandemic.
During the pandemic, the company faced a myriad of headwinds: supply chain issues, the skyrocketing cost of materials, and demand it simply couldn’t keep up with.
The company had difficulty maintaining margins because of its dealings with insurers, as prices are generally negotiated and followed. Although its strong relationships with its insurers allowed it to increase charges to a certain degree, it was no doubt a difficult period for the company.
Fast-forward to 2023 and 2024, and most of the pandemic-related headwinds have subsided. There has been notable margin improvements and the company is starting to get back on track.
However, a modest winter in North America, backed by some of the hottest winter temperatures on record, fueled a decline in overall demand for the company.
We do have to remember that this is a collision and repair company. Winter is undoubtedly a time when more collisions will occur, so the harsher the weather, the more accidents are likely to happen.
In addition to the modest winter, the company is seeing a reversal of a COVID tailwind that has now turned into a headwind, that being the demand surge it witnessed in 2021/2022.
If you’ve been following the used automobile sector over the last few years, you’d probably have noticed something. Used automobiles skyrocketed in value.
Because of this, demand for Boyd’s services went through the roof. When used automobiles rise in value, insurance companies are more reluctant to write vehicles off, instead opting for repairs. Generally, if the cost of repairs is lower than the vehicle’s overall value, they’ll repair it. If repairs were to exceed the value of the vehicle, they’d write the vehicle off.
Now, however, we’re seeing a rapid decline in the overall cost of used vehicles. In fact, if we look to CarGurus.ca, you will see that almost every major vehicle has witnessed a double-digit decline in year-over-year price.
Ultimately, this will lead to lower demand for Boyd’s services. As used vehicles get cheaper, insurance companies will begin to write more vehicles off over opting for repairs.
As a result, Boyd is realizing lower demand for its services.
The combination of this and the modest winter conditions has caused it to report two fairly soft quarters.
However, over the long term, demand will normalize, and one-off weather conditions are just that – one-off weather conditions. That is why I’m still fairly bullish on the company at this time.
Boyd’s Valuation
Because Boyd is an acquisition-heavy company, it is going to have a lot of depreciation and amortization of assets on its income statement. These are “non-cash” expenses, meaning it doesn’t really cost the company any cash in the current year.
The better valuation metrics for a company like Boyd would be its price to free cash flow and its price to operating cash flow. Free cash flow adds these non-cash expenses back into its figures to give a better picture of the company’s profits.
If we look to the charts below, you’ll notice that outside of the panic sale during the COVID-19 pandemic, this is the cheapest Boyd has been on a price-to-free cash flow and a price-to-operating cash flow basis in more than a decade.
Right now, Boyd is trading at 13x free cash flow and around 10.6x operating cash flow.
If we look to the company’s median numbers when it comes to both of these metrics, Boyd typically trades around 17x free cash flow and 14x operating cash flows.
On both the FCF and OCF side of things, the company is trading at around a 25% discount to its historical averages.
Prior to reporting a couple of soft quarters, the company was trading right in line with its historical averages, suggesting that if these two quarters are the worst of it, we could see a multiple expansion on both a price-to-free cash flow and operating cash flow basis, potentially even back to historical averages.
Boyd’s debt situation
For many acquisition-heavy companies, we typically see high debt loads. A prime example of this would be a company like Park Lawn. The company was weighed down heavily by overall debt costs, which ended up materially impacting earnings.
Boyd, on the other hand, carries only $615M in long-term debt. To put this into perspective, the company could pay off its entire debt load with 18 months’ worth of free cash flow. A company like Park Lawn would have taken 7 years, while a high-debt telecom company like BCE would take 13 years.
While this is generally an arbitrary way to evaluate a debt structure, it is one I have found particularly useful, as the more free cash flow a company generates relative to its debt, the more flexibility it has. In this regard, Boyd is flexible.
Interest costs make up a small portion of the company’s earnings, and even if policy rates stay elevated, they shouldn’t impact the company’s overall strategy.
The bear case
Although there is little doubt Boyd is trading at a large discount to historical valuations, there are some small risks here that I figure I should mention for those considering a position.
For one, the mild winter conditions in the face of rising global temperatures is looked at by the company as a one-off situation. However, if winters become milder more consistently, we will likely see slower winter demand for Boyd, which is typically a high-demand season.
In addition to this, slowing inflation and the continued decline in automobile prices could result in lower demand for the company’s services moving forward. Although the company will eventually absorb and adjust to this lower demand, it could impact results over the short term as it does adjust.
I see the warmer winters as a bit of a long-term risk for Boyd, while the lower demand is something that won’t impact the company much over the long term but could lead to short-term weakness in terms of results.
In this situation, it would just allow me to accumulate more shares at a cheaper price, which I’m more than ok with.
Overall, operational weakness recently is more than priced in in my opinion
I established a 2.5%~ position in Boyd Group Services not too long ago, and although I planned to keep it between the 2-3% range in terms of allocation, there is no doubting the attractiveness from a valuation standpoint right now.
I will likely continue to accumulate shares of the company with my weekly contributions while it trades at a 25%~ discount to historical averages. I will likely build my position out to be between 3.5%-4%.
This outstanding company generates consistent returns and has a business model that practically anyone can understand. It is being weighed down right now by things that are realistically out of its control.
It has been one of the best-performing Canadian stocks over the last 10-15 years, and I fully expect it to be a strong performer moving forward.
Once operations turn around, it should be able to get back on track in terms of growth and continue to expand its margins as inflation settles and it adjusts more agreements with insurers.
