Who Should Take Keystone's Place In the Auto Retail Index?

by: Jerry Marks

The art of progress is to preserve order amid change and to preserve change amid order.

Source: Alfred North Whitehead, wisdomquotes.com

It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.

Source: Charles Darwin, wisdomquotes.com

The important thing is this: To be able at any moment to sacrifice what we are for what we could become.

Source: Charles Dubois, wisdomquotes.com

We know what we are, but know not what we may be.

Source: William Shakespeare, wisdomquotes.com

If you want to make enemies, try to change something.

Source: Woodrow Wilson, wisdomquotes.com

Keystone acquisition creates potential change to AutoRetailStocks.com index
Change looks to be upon us. With LKQ's (LKQX) announced plans to acquire Keystone (KEYS-OLD), it presents the challenge of possibly having to replace the company with a new name in the autoretailstocks.com index.

To begin, I do not want you to interpret today's email as an endorsement or even expectation that Keystone will be acquired by LKQ for $48.

I still think shareholders deserve a better price.

And in the coming weeks (and possibly months) I plan to work very hard to make sure Keystone's Board of Directors are acting in the best interest of its shareholders (because right now I do not think they have fulfilled their fiduciary responsibility).

For example, did they solicit bids from other interested parties? I can think of another key recycler that could also benefit a lot (from synergies) with Keystone. Not to mention private equity firms that could see it as an attractive investment opportunity.

The bottom line is that the $70 million in total operating income that I think LKQ can get from Keystone's facilities in a few years, is what I think Rick Keister (CEO of Keystone) and his team were on track to deliver to Keystone's shareholders anyway.

On an after-tax basis the $70 million operating income works out to roughly $2.46 in earnings per share (eps). The wildcard of course would be what multiple would shareholders be willing to pay for Keystone's stock if they achieve this profitability in fiscal 2010?

But if they were at the point of having margins closer to LKQ and were showing some decent top line sales growth (all very possible in my opinion), at an LKQ multiple (29x), Keystone's shares would be worth $71 (50% more than what LKQ is currently offering today). I know this is three years out and a lot of ifs. And a bird in the hand is better than one in the bush.

The point I am simply making is that Keystone had a lot of upside potential on its own. And as I discussed yesterday LKQ really gains a lot from the acquisition (in fact there just doesn't seem to be a lot of risk factored into the deal).

So for Keystone to sell out for such a modest premium causing its shareholders to miss out on all that upside is irresponsible (on the part of the board of directors) in my opinion.

I hope the board of directors will hear my pleas to reassess the offer.

My concerns about Keystone's board aside, I still need to prepare for a possible change in the index. As usual, I like to solicit reader feedback about what you would like to see covered.

As I have discussed on many occasions, I think the index itself is a great sandbox (up 22.6% since rankings issued July 7, 2006). And the reason is because vendors of auto products are fragmenting while auto retailers are consolidating (buyer power versus supplier power is shifting making for an attractive long term secular investment story).

However, the decision to add a company to the index has little to do if the stock makes for an attractive investment (today). The attractiveness of investing in a security comes and goes over time (as market psychology ebbs and flows).

Instead, what qualifies a company to be a member of the autoretailstocks.com index is its relevancy and significance to the space.

Now until the Keystone issue becomes clearer, I am only asking for reader input on who you would like to see added.

Below are 4 candidates I think might make a great addition to the index.

Please send me an email with your "vote" at jerry@autoretailstocks.com. Or if you have another name you would like to see considered, I am open to that as well.

Candidate #1: U.S. Auto Parts (NASDAQ:PRTS)
According to company press releases. . .

U.S. Auto Parts is a leading online provider of aftermarket auto parts, including body parts, engine parts, performance parts and accessories.

Through the Company's network of websites, U.S. Auto Parts provides individual consumers with a broad selection of competitively priced products that are mapped by a proprietary product database to product applications based on vehicle makes, models and years.

U.S. Auto Parts' flagship websites are located at www.partstrain.com and www.autopartswarehouse.com and the Company's corporate website is located at www.usautoparts.net.

Candidate #2: Avis Budget Group (NASDAQ:CAR)
According to company press releases. . .

Avis Budget Group (CAR) is a leading provider of vehicle rental services, with operations in more than 70 countries.

Through its Avis and Budget brands, the Company is the largest general-use vehicle rental operator in each of North America, Australia, New Zealand and certain other regions. Avis Budget Group is headquartered in Parsippany, N.J. and has more than 30,000 employees.

For more information on Avis Budget Group, visit http://www.avisbudgetgroup.com.

Candidate #3: Finish Master (OTC:FMST)
According to company press releases. . .

FinishMaster is the leading national independent distributor of automotive paints, coatings, and related accessories to the automotive collision repair industry.

The Company is headquartered in Indianapolis, Indiana, and operates three major distribution centers and 168 branches in 39 of the 50 largest metropolitan areas in the country.

For more information on FinishMaster via the Internet, visit FinishMaster's website at http://www.finishmaster.com/.

Candidate #4: Dorman Products (NASDAQ:DORM)
According to company press releases. . .

Dorman Products, Inc. is a leading supplier of OE Dealer "Exclusive" automotive replacement parts, automotive hardware, brake products, and household hardware to the Automotive Aftermarket and Mass Merchandise markets. Dorman automotive parts and hardware are marketed under the OE Solutions, HELP!, AutoGrade, First Stop, Conduct-Tite, Pik-A-Nut and Scan-Tech brand names.