A Solid Yield with a Growing Company

08/14/2012 10:30 am EST

Focus: GLOBAL

Patrick McKeough

Editor, Successful Investor

This unit trust is kicking off a nice yield and growing its business through smart acquisitions on both sides of the border, reports Pat McKeough of TSI Network.

Boyd Group Income Fund (BYD.UN) operates 186 auto-body repair centers in western Canada and in 14 US states. These shops operate under a number of banners, including Boyd Autobody & Glass, Gerber Collision & Glass, True2Form, and Cars Collision Center.

Boyd is growing rapidly by acquiring independent shops and small chains. For example, in July it paid $4.4 million for Pearl Auto Body, which operates six repair shops in Colorado.

Thanks to purchases like this, Boyd is now the largest collision-repair shop operator in North America by number of locations and annual sales. The US accounts for 82% of its revenue.

Growth by acquisition is riskier than internal growth for a variety of reasons, but they all come out of the fact that acquisitions carry an above-average chance of unpleasant surprises. When you buy just about anything, you rarely know as much about it as the seller. If a company makes enough acquisitions, it is bound to buy some with hidden or unforeseen problems.

Goodwill and the Potential Pitfalls of Writeoffs
Generally speaking, when one company acquires another as a going concern, it pays more than the value of the tangible assets that it acquires as part of its acquisition. This excess of acquisition price over tangible-asset value is treated as “goodwill” on the buyer’s financial statements.

If an acquisition turns out to be a dud and the acquired operations suffer a plunge in earnings or start losing money, the acquiring company has to write off, against its current year’s earnings, some or all of the value of goodwill that it acquired as part of the acquisition. Writeoffs like these may seem to come out of nowhere when they are announced, and they can spur a steep drop in the acquirer’s stock price.

It generally pays to stay out of stocks in which goodwill represents a big part of their net assets per share. If these companies have to write off just part of that goodwill, it can have a devastating impact on their earnings and stock prices. In most cases, particularly if the goodwill comes from the acquisition of a handful of big, ambitious purchases, the risk often isn’t worth it.

Boyd is mainly buying small companies. That cuts the risk of a big writedown against its earnings if any one of its acquisitions fails to live up to expectations. Boyd is also purchasing companies that operate in a variety of US states. This helps cut its exposure to any one state or region.

In the three months ended March 31, Boyd’s revenue rose 31.7% to $107.4 million, from $81.6 million a year earlier. Earnings per unit before one-time accounting adjustments rose 8.3%, to 26 cents from 24. The units yield 3.1%.

Boyd’s long-term debt of $37.1 million is a reasonable 20% of its market cap. However, its $60.7 million of goodwill and intangibles is a high 33% of its market cap.

The company’s earnings continue to rise, partly due to the slower North American economy. When unemployment is high, consumers are more likely to repair an old car than replace it with a new one. That has helped the stock rise 33% since the start of 2012.

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