Motorcar Parts of America Inc., still struggling with a 2011 acquisition that has been an ongoing drag on earnings, is under pressure from a hedge fund investor to more decisively address the problems.
Without suggesting what steps he wants the company to make, Jacob Muller, a portfolio manager at AYM Capital LLC in New York, said the unit, Fenco, is “impacting results to a level that if it doesn’t get better over the next few periods, I would think that we’ve got to admit to ourselves this is not working.”
MPA spent $5 million in May 2011 to purchase Fenwick Automotive Products Ltd. (Fenco), a money-losing Canadian auto parts maker whose brake parts, axles and other so-called under-the-car products were expected to complement MPA’s electrical car parts business. Indeed, with Fenco in the fold, MPA’s revenue more than doubled to $364 million in the fiscal year ended last March 31. But efforts to turn the ailing subsidiary profitable, including cutting unprofitable products and reducing staff, have proved elusive.
MPA’s chief executive, Selwyn Joffe, said in a Feb. 15 conference call with analysts and investors that he believed the turnaround was coming.
“We are evaluating the new state of our business and plan to update our guidance in the near future,” Joffe said on the conference call. “While this quarter was very soft, we do not believe it provides an accurate picture with regard to the potential of the under-car product segment.”
Company executives declined to comment further.
On Feb. 15, MPA reported third quarter net income of $935,000 (6 cents a share), compared with a loss of $21.8 million
(-$1.74) in the year-earlier quarter. Revenue for the Torrance company rose 38 percent to $116 million. The Fenco unit contributed an operating loss of $6.9 million, compared with an operating loss of $10.6 million in the same quarter the previous year.
The earnings release sent the company’s stock down more than 18 percent to $5.73 for the week ended Feb. 20, making it the biggest loser on the LABJ stock index. (See page 64.)
Jimmy Baker, an analyst at B. Riley & Co. in West Los Angeles, said he was surprised at the magnitude of the problems at Fenco. The company needs to move beyond cost-cutting at the unit and find new customers for it. Barring that, MPA might need to seriously consider abandoning Fenco.
“This remains a very troubled business and investors are clearly frustrated with the company’s inability to meet its forecasts,” he said.
He has a “neutral” rating on the stock and reduced his target price to $4.75 from $6.50 on Feb. 19.
Prior to the acquisition, Fenco gained market share by offering low prices to retailers, at the cost of profitability, Baker said. When MPA tried to raise those prices, it lost some of that business, including one retail customer that accounted for nearly one-third of Fenco’s sales.
“They need to go out and win new business on profitable terms,” Baker said.
Before the acquisition of Fenco, MPA’s main business was selling ignition and electrical components such as starters and alternators. Now, Fenco’s under-car products – rack-and-pinion steering systems, brake calipers and master cylinders – account for more than half of MPA’s sales.
While Fenco has been a drag, MPA’s starter and alternator business has continued to grow. The company said that side of the business accounted $50.7 million in third quarter revenue, an increase of 20 percent from the previous year.
The Fenco acquisition initially excited investors, who expected the expanded product line would help the automotive aftermarket company as more do-it-yourselfers held on to aging automobiles in the United States, Canada and Mexico.
Shares of MPA shot up to $15 when the acquisition was announced, but have since slid dramatically, hitting $4.04 in July. They have since rebounded modestly, trading in the $5-$7 range for the last three months.
At the time of the Fenco purchase, the company said that it would take two years to fully integrate the new business into its operations and projected that the under-car line would start generating earnings of $15 million by this May. Given its current performance, the company is revising that estimate.
“We’ve definitely struggled in terms of getting it profitable as quick as we had hoped,” Joffe said on the call.
The acquisition proved more costly and troublesome from the beginning. MPA had to bring Fenco’s books in line with standards of public companies and had to spend millions in streamlining costs.
Last year, the company issued $15 million in private stock to help finance the effort, which diluted stock value, and discontinued selling Fenco products at one of its biggest customers because the line was unprofitable. The customer, Advance Auto Parts Inc. of Roanoke, Va., had accounted for 31 percent of Fenco sales, Baker said.
MPA has consolidated its logistics operations in a single Pennsylvania location and has begun shipping under-car products out of its Torrance facility. It also has cut unprofitable product lines, such as axles and clutches. Joffe said on the call that the company is “making good progress on the final stages” of the plan to turn around Fenco.
AYM’s Muller, who declined further comment, said on the conference call that the company might have been better off if it had not made the Fenco deal in the first place.
“At what point do you say, this is not working and just say maybe this can’t carry the debt load it’s standing on?” he said. “At what point do we finally admit that this is not working out and just move on?”
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