U.S. Auto Parts Network (NASDAQ:PRTS) shares present a good buying opportunity now and company can be sold in the near future at a decent premium. U.S auto parts network is under pressure from activist investors due to the series of negative earnings and is being asked to put itself for sale or atleast divest the AutoMD subsidiary. I believe that the right buyer can pay $8 per share for entire company based on recent transactions in the Auto parts Industry.
Online auto parts industry is a growing segment which still has low penetration and has experienced decent growth. Google has experienced a 6 year compound annual growth rate ("CAGR") of 15% in queries for automotive parts. Mobile year over year queries increased 50% and 80% from cellphones and tablets, respectively. Online auto parts is one of the fastest growing category for Auction Giant Ebay.
US Auto Parts Network Inc is a market leader in the segment with close to 12% market share. Reason for the stock languishing at such low numbers is decrease in revenues, margins and earnings since 2011. Earnings have decreased due to decrease in revenue. What most shareholders have overlooked is the reason for this decrease. Like most e-commerce retailers, the success of PRTS depends on the ability to attract online consumers to their websites and convert them into customers in a cost-effective manner. To do this they depend mostly on search engines and have had a history of success with search engine marketing techniques, which gave their websites preferred positions in search results. But search engines, like Google, revise their algorithms from time to time in an attempt to optimize their search results. Since 2011, Google has released changes to Google's search results ranking algorithm aimed to lower the rank of certain sites and return other sites near the top of the search results based upon the quality of the particular site as determined by Google. Google made additional updates throughout fiscal year 2012 and 2013. PRTS web properties were negatively impacted by the changes in methodology for how Google displayed or selected our different websites for customer search results. This reduced the unique visitor count which adversely affected the financial results of PRTS. The unique visitor count decreased by 9.2 million, or 22.2%, for the third quarter of 2013 to 32.3 million unique visitors compared to 41.5 million unique visitors in the third quarter of 2012. They were affected by these search engine algorithm changes due to the use of same product catalog across multiple websites. To address this issue, company is consolidating to a significantly smaller number of websites to ensure unique catalog content. The issue regarding google search algorithms is mentioned in the company's 10Q report. We think that in the coming months, this issue would be fixed and PRTS websites should start experiencing positive unique visiter growth.
Here are some of the measures taken by the Company that we believe would help lift the stock value to $5 or above.
- Company is already working to identify and fix the search engine issues.
- working to reduce expenses by identifying areas of work force reduction and moving call center operations to phillipines.
- already sold the JC whitney distribution facility for $9.8 million to pay off the credit revolver facility. http://www.costar.com/News/Article/REIT-Buys-JC-Whitney-Distribution-Center-for-$98M/147948
- Company has increased the SKU's and inventory for private labels which produces higher margins for them.
- Divesting the AutoMD business would be another measure that the management might take under pressure from shareholders.
The word on the street is that US auto parts is finally in the process of actively seeking a buyer for AutoMD. Despite the fact that AutoMD has been a drain on Company resources for several years now, investors believe there is tremendous value inherent in its technology and intellectual property (such as DIY How-To Guides, a nationwide repair shop locator, a repair cost estimator, etc…) that the right strategic buyer or investment group will find very appealing.
By employing a properly managed sale process I believe AutoMD can fetch $10-$15 million. Valuation is based on the fact that there is clearly a very attractive investment environment for this type of start-up. This is illustrated nicely by the $20 million strategic investment into RepairPal.com led by Cars.com and Castrol, the multi-million dollar investment into BodyShopBids.com led by the co-founders of Groupon, and OpenBay.com's October announcement that it has received start-up funding from venture capital luminaries Google Ventures and Andreessen Horowitz - the entrepreneurs behind the first Internet browser.
The benefits from AutoMD's sale can be far-reaching as it has the potential to become a major catalyst for improving the Company's stock price. At a minimum, we believe the divestiture will manifest itself in annual savings equal to $4 million. These savings should drop straight to the bottom line and go a long way toward narrowing the chasm that currently exists between profit and loss. In a more positive scenario, the Company saves millions annually and uses the sale proceeds to strengthen the Company's balance sheet, which in turn will reduce interest expense while empowering management to negotiate improved vendor payment terms and conditions.
In the scenario, that US auto parts Network puts itself for sale, it would be an attractive acquisition target for a strategic buyer. Less than one year ago AutoZone acquired AutoAnything, a major competitor to US Auto Parts, for up to $150 million in cash, which we estimate to be a sale price of approximately 1x sales (US Auto Parts is currently trading around 0.25x trailing-twelve-month sales). Applying the transaction metrics in the Auto Anything transaction, US Auto Parts would be valued at $8.10 per share. I believe that a conservative sale price of $5-$6 per share is achievable.
The industry segment is going through a consolidation and recent buyouts by major players to increase ecommerce footprint and revenue are common.
Disclosure: I am long PRTS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am a long term investor in PRTS and own shares.