It should be a gloomy time for Keystone Automotive Industries Inc.
The Pomona-based supplier of generic aftermarket auto parts saw three of its distribution facilities in New Orleans, Florida and Alabama pummeled by hurricanes Katrina and Rita, costing it $700,000 in sales and $350,000 in insurance deductibles.
But the company just recorded its best second quarter ever, and it is in talks with several parts distribution companies as it gears up to use a new $75 million line of credit for a series of acquisitions.
Just last month it bought Veng USA, a Peekonk, Mass.-based distributor of generic aftermarket parts with annual revenues of $37 million.
There’s new life to the aftermarket parts industry, thanks to rapidly improving Chinese manufacturing techniques, demands from auto insurers to keep collision repair costs down and a recent court decision on that issue.
“The area of crash and service parts for major repairs is an extremely profitable business,” said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. “We’re witnessing some very, very fast-paced changes. It’s going to be even more profitable.”
With the exception of a small unit that repairs and resells damaged bumpers, Keystone is a wholesale distributor that generally buys parts from overseas and sells them to repair shops. It reported net income of $2.9 million for the second quarter ended Sept. 30, a jump of nearly 21 percent over a year ago. It sales rose 9.3 percent, to $139.2 million.
Healthy industry
Overall, the U.S. automotive aftermarket industry, excluding heavy-duty trucks, rang up sales of about $190.5 billion in 2004, a 4.8 percent increase over 2003, according to the Automotive Aftermarket Industry Association, a Bethesda, Md. trade group.
Sales are expected to only accelerate after the Supreme Court of Illinois reversed a lower court $1.06 billion judgment against State Farm Insurance Co., the nation’s largest auto insurer.
In a national class action lawsuit, State Farm was accused of consumer fraud for ordering that generic aftermarket parts be used for repairs in its collisions claims, a practice that kept costs and premiums down. The reversal essentially frees State Farm and other insurers to purchase aftermarket parts from body shops for collision repairs, a major boost to the industry.
The decision was so important that industry analysts expect dealerships, long the prime competitor to outfits like Keystone, will be forced to start supplying generic parts to their associated repair shops.
“The (original equipment manufacturers) have dominated the business for many years,” said John Palumbo, Keystone’s chief financial officer. “Now you’re starting to see Chevy or Toyota dealers selling aftermarket parts. It’s a tremendous endorsement of the aftermarket industry. Now they can’t say they’re low quality parts anymore. It will accelerate aftermarket parts sales.”
The automakers’ move into the distribution of generic parts could be viewed as additional competition, but analysts say that the growing size of the aftermarket parts industry will more than make up for that.
Moreover, Keystone is well positioned with its past acquisitions. Founded in 1947, the company has grown largely by buying up a total of 38 smaller distribution businesses over the years. Its line of body parts including fenders, hoods, radiators and headlight and tail light assemblies accounted for $293.9 million, or 53 percent, of revenue last year. Bumpers accounted for another 29 percent, or $163.1 million. But there have been some bumps in the road.
This includes headlights, which only account for 16 percent of sales, but with their higher price, small size and low shipping cost, are its most profitable line. Keystone had seen double-digit sales growth in headlights, but was forced to stop selling them last year after performance test failures. That sent Keystone’s stock, which had been trading above $22, to less than $20.
Keystone resumed headlight sales last April and expects them to climb back slowly over the next year. Its stock also has recovered, rising above $30 before settling below that the last few months. It closed at $29.80 on Nov. 2.
“There’s dramatic restructuring of the major (auto) suppliers. It’s going to become very profitable,” Cole said. “That’s why so many investors are coming to the party.”
