Trust the Midas Touch Again?

07/10/2008 12:00 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

George Putnam, editor of The Turnaround Letter, says the venerable muffler and auto-care retailer is reinventing itself under a new CEO.

Midas (NYSE: MDS) was founded in 1956 as a retailer of mufflers and other parts for automobile exhaust systems. It went public in 1961, was acquired in 1972, and was spun out as an independent public company again in 1998.

Midas has one of the best-known brands in the automotive after-care market. The company’s original muffler and exhaust products business has suffered over the last decade or so as car manufacturers have developed much longer-lasting exhaust systems.

The brand languished as the need for replacement mufflers diminished, but the company brought in a new chief executive officer, Alan Feldman, in early 2003. Feldman, who had previously worked for brand powerhouses McDonald’s and PepsiCo, is revitalizing it. Feldman closed Midas’s wholesale parts distribution business, broadened its product line, and focused on rebuilding the franchise segment of the business.

The company is continuing to broaden its product line beyond mufflers. Initially adding brakes and brake service, it has expanded into a full line of repair services, and is now selling tires in many locations. The new products and services being added by Midas should help fuel revenue growth.

Midas has developed a valuable niche between the expensive, car dealer service operations and the inexpensive, single-service (such as oil change) shops. With its well-known brand and national footprint of shops, Midas is well positioned to capture business from motorists who want a full line of automotive services at a reasonable cost.

The automotive service business, which has traditionally been highly fragmented, is ripe for consolidation. Here again, Midas’s brand and broad range of services can work to its advantage. For example, Midas recently acquired the SpeeDee chain of oil-change and tune-up shops, and it plans to use these shops as a platform for many of the other Midas products and services.

By focusing on franchising, Midas can expand its business with relatively little capital expenditure. As a result, the business generates strong cash flow. While the company has some debt, the balance sheet is reasonably strong.

Another significant asset for the company is its real estate. Midas owns 223 of its retail sites, and it holds many others through favorable long-term leases. Most of its sites are in prime, high-visibility locations.

We believe that by broadening its product line and acquiring smaller chains, Midas will be able to leverage its brand and national reach to significantly increase revenues and profits over the coming years. We recommend buying Midas up to $20. (The stock closed at $14.50 Wednesday—Editor.)

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