Recently we discussed the importance of developing a strategy and the implications consolidation has on your business. A big part of developing a strategy, whether it is stand pat, buy or sell is understanding what your competitors are up to in the marketplace. I am often asked about the goings on of other large players in the industry. It is good business to be aware of the goings on of key competitors in your marketplace. But many owners do not realize that much of this competitive intelligence they seek out is at their fingertips if they know where to look. For the next few weeks I will share one of my favorite sources of publicly available competitive intelligence with you.
Acquisitions, who acquired whom and the price paid for such acquisitions is always a topic of much speculation. When acquisitions are completed by a public company, or semi-public company perhaps planning to go public, often much of this information is disclosed in required public filings. Industry trade associations or investment banks will put out research reports that provide substantial competitive information as well.
Public companies often provide substantial insight into the drivers of profitability. For example, looking slightly outside the collision industry, the Sonic Automotive Group, one of the largest vehicle retailers in the country, recently reported that the Service, Parts, Collision and Warranty segment of their business accounted for only about 15% of revenues but a whopping 40% of profits. Tracking the drivers of profitability often provides clues to the strategy of a major competitor. In Sonic’s case, clearly servicing and repairing vehicles is nearly as important as selling vehicles.
There is a treasure trove of operational and financial information contained in the public disclosures. The Boyd Group, one of the largest collision repair companies in the world publishes reports every three outlining business results in incredible detail. Boyd runs a very effective collision repair and glass business and is currently valued at over $1 billion on the Toronto Stock Exchange (Editor’s Note: All amounts in reference to The Boyd Group are in Canadian dollars and are as of 3/31/2015 unless otherwise specified). Because they are a publicly traded company they are required to disclose anything “material”, or substantially important in other words. As a result, we can learn a lot from the state of the collision repair industry from what they tell us. But it is important to understand how to read these disclosures.
For the next few weeks I am going to spend some time analyzing The Boyd Group’s 2014 year end financials and will share insights that will help you maximize the value of your business. We will look at the income statement (sometimes referred to as a P&L or Profit and Loss Statement), the balance sheet, and the statement of cash flows. Using the information provided therein, we will talk about the metrics you can use to analyze operations and how you can compare that information to your own business.
But before I get into the details, I want to highlight some unique financial aspects of The Boyd Group. One item that stands out in particular is that the company consistently reports a negative net profit – over $15 million is losses in 2014 and nearly $12 million in 2013. In other words, according to public record, the company is operating at a massive loss.
Yet while this company operates at a loss of millions of dollars a year it is a viable stock that has appreciated over 30% over the past 12 months on the Toronto Stock Exchange. The Boyd Group also:
- currently has an enterprise value of over $1 billion;
- regularly pays millions of dollars in dividends – over $7 million in 2014;
- has $200 million in “dry powder” for further acquisitions;
- completed over $124 million in acquisitions in 2014;
- signed with a major syndicate of banks to provide $100 million line of credit in 2013; and
- completed two public offerings of stock selling over $100 million in equity in 2013 and 2014 combined.
These facts do not sound like a company that is “unprofitable”. Because The Boyd Group operates at a net loss, many people assume that this must be a poorly managed company or that some fancy Wall Street firm is somehow pulling a fast one on the investing public. However, the opposite is true – The Boyd Group actually is very disciplined, incredibly well managed, and very profitable. They truly understand how to use finance to drive systematic growth.
Net Loss vs. Cash Flow
Ultimately a business is in existence to produce cash. The Boyd Group generates a lot of cash but not very much profit. In 2014 The Boyd Group reported a net loss of $15 million but a net increase in cash generated from operations (i.e. collision and glass services) of $49 million. They also generated an adjusted EBITDA of $69 million.
(Editor’s Note: Management did reach out to offer additional insight after this article was originally published. According to the company, “Boyd is required to follow International Financial Reporting Standards, which is different from US GAAP. Reporting under US GAAP would result in Boyd reporting net earnings at levels similar to Boyd’s reported Adjusted Net Earnings. Adjusted Net Earnings is a more appropriate measure of profitability.” Adjusted Net Earnings in 2014 were $30 million.)
To understand how The Boyd Group operates at a net loss but generates tens of millions of dollars of cash a year for investors is to understand the difference between accrual and cash accounting. And to understand those different accounting methods, we have to understand corporate finance, more specifically how the income statement, the cash flow statement, and the balance sheet link together to tell a story. The true story behind how the company generates cash is hidden amongst all three financial statements.
When I was in business school a lot of time was spent discussing financial statement analysis – so much so that multiple courses taught by PhD’s and CFA’s were devoted to the topic. When I was an equity research analyst hours upon hours were spent analyzing and reconstructing financial statements. The point of these exercises was always to understand the cash position of a business. As one of my professors was fond of saying, “You can’t pay bills with profit, just cash.”
Next week we will dive into the three key financial statements The Boyd Group discloses every quarter. We will also look at some of the hidden diamonds in the rough that can provide additional operational and strategic insight into what one of the largest collision repair companies on the planet is doing. While I recognize some of these topics can be intimidating and at times dry, I will keep the discussion at a high level. The purpose of these upcoming articles will be to generate insight into how you can better manage your business while also understanding how one of the largest collision repair operators in the world does business. If you are an especially eager beaver, you can start by reviewing Boyd’s 2014 year end financial statement available for download here: Boyd 2014 Year End Financial Results.
I’m eager to hear from you. Shoot me an email via my contact page to discuss further as we explore The Boyd Group together. I find the transformation in the industry truly fascinating and all communication is kept strictly confidential.
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