How would you like to own the only publicly-traded company in a rapidly consolidating space at a discount to
recent private equity transactions? From 2006 to 2016, Boyd was the best performing stock on the TSE. Despite this already outstanding result, I believe there is more upside left in the shares.
At the price of C$84.00, the shares trade for ~11x 2018E EBIT. Using 2017 estimates, I calculate the shares trade
for ~12x EBITDA, whereas a competitor was recently purchased for 15.2x pro forma adjusted EBITDA.
The North American auto repair market is highly cash generative and recession-resistant as repairs are non-
discretionary and mostly paid for by insurance companies. Boyd has the opportunity to continue to grow same store
sales from increased repair spending but mostly from market share capture and additional acquisitions of single sites
and multi-shop operators (MSOs).
Boyd is an operator of 362 non-franchised North American collision repair centers. These body shops provide repair
services to insurance companies, individual vehicle owners and fleet/lease customers. Two other smaller businesses
consist of retail auto glass operations (42 centers) and a third party claims administrator (Gerber National Claim
Services*) which acts as a middleman between the customer and the fleet management and insurance segment for
emergency roadside assistance (i.e. first notice of loss, glass and other services). These smaller units account for
10% or less of revenues. The Canadian listing is a misnomer as >90% of Boyd's revenue is from its US operations.
*GNCS cites 5,500 and 4,600 affiliated glass provider locations and emergency roadside service providers.
For the main business of collision repair, the drivers of revenue include accident frequency and the cost of repairs.
Both claims frequency and repair severity has climbed as a function of increased miles driven, congestion,
sophisticated automotive technology and complexity in new cars (high recent SAAR means more new cars which
means increased claim severity and higher likelihood of repair; collision avoidance technology is an offset).
The key advantage Boyd maintains over smaller players is access to Direct Repair Programs (DRPs). These are
preferred programs (i.e. referral arrangements) with insurance companies that drive volume to more sophisticated
national body shop networks. It is a symbiotic relationshipas companies like Boyd offer insurers higher customer
satisfaction, quicker repair times (reduced length of car rental) and lower average cost of repairs through economies
of scale and best practices (e.g. repairs higher percentage of damaged parts versus replacing). As a result, insurance
carriers recommend these locations to customers looking for a body shop after an accident. These national, regional
and local DRPs provide an opportunity to drive market share wins as insurers seek to consolidate repairs with fewer
shops to reduce cost and complexity and add consistency.
From the insurer’s perspective, this is an important point of contact with the customer. Many customers view the
repair process as an extension of the insurance company. A significant portion of customer satisfaction with the
insurer is determined during this phase. A good result (high quality and quick turnaround) leads to better customer
retention, which ultimately reduces customer acquisition costs for the insurer.
To explain the process a bit further, I’ll provide an example. The average driver gets into an accident every seven
years. The claims process begins when the driver calls his/her insurance carrier. In most cases, the insured selects an auto body shop from a list of recommended centers provided by the carrier as part of its DRP. In many cases, instead of sending out an adjuster, the shop completes the estimate and paperwork for the insurer. Immediately or shortly after the repairs are completed, the insurance company remits payment to the body shop. Again, being part of these programs allows Boyd to win share at the expense of smaller operators and to rapidly increase volumes at newly-acquired shops. The acquired shops also benefit from re-branding, new contracts with vendors replacing existing arrangements and general operational improvements.
US collision repair spending is expected to increase ~1% annually over the next five years (per CCC). This is
slightly lower than recent trends. The breakdown of this spending is as follows: Labor (45%), parts (41%), paint
and other materials (10%) and other miscellaneous (4%).
The collision repair industry is highly fragmented. Most shops are small independents - family-owned or single site
operations. In recent years, the trend has been slightly growing total collision revenue* spread over a few number of
shops. For example, in 2006, total sites approximated 45,000 compared to ~33,000 today. Over the same timeframe,
revenue per site rose almost 50%. Large MSOs control an estimated 21.5% of the US$36+ billion market but
account for only ~6.5% of total locations. This results in plenty of remaining consolidation opportunities. Outside of
Boyd, the larger players include Service King (Blackstone and Carlyle), Caliber Collision (OMERS and Leonard
Green) and Abra Auto Body & Glass (Hellman & Friedman).
*Comprised of paint and body repair (~80%), glass repair and replacement (~10%) and other.
Why do smaller players sell?
There are several reasons but a few include reduced volumes as larger MSOs gain market share, required capital
expenditures due to more complex jobs (including aluminum repairs where equipment can cost $50,000-$100,000) and succession issues.
More on Company
Boyd added 58 locations in 2016 and reported same store sales growth of 5.3% compared to 5.6% and 7.2% in 2015
and 2014, respectively. This compares to the 5-year and 10-year averages of 4.7% and 4.5%. The company has
reported 16 straight quarters of same store sales growth. The average Boyd facility (including glass operations)
generates approximately 3x the revenue compared to the industry average.
For new shops, Boyd employs the "Wow Operating Way" initiative to drive operational process improvements,
specifically cycle times and customer satisfaction. These best practices are rolled out to all new locations within a 3-
9 month timeframe. Due to relatively high fixed costs, incremental volumes show a high contribution margin. As
such, gross margins at mature stores are higher compared to new or recently-acquired sites. As these newer facilities age, we should see overall margins improve.
In recent years, Boyd added more corporate development resources to help drive M&A activity. Management's
growth target is to double the business over the next five years (started in 2016) through same store sales,
acquisitions and new site development (e.g. 7 start-ups and brownfields added in 2016). Boyd targets 25% pre-tax
ROIC (defined as EBITDA/invested capital – implying 4x pro forma EBITDA). Typically, larger MSOs sell for ~7x
EBITDA whereas single sites receive 4x-5x (seller’s) EBITDA. When rolled into a larger system, the multiples are
estimated to be ~2x lower on a synergistic basis after factoring in incremental volumes, improved vendor terms
(parts, paints, rental cars, etc.) and the upgrading of under-invested facilities.
The business is capital light as most repair facilities are leased and maintenance capital expenditures are estimated at ~0.8% of sales. Additionally, this industry operates with negative working capital due to short-term receivable
cycles from insurers*. This serves as another source of cash flow as the company grows. Therefore, Boyd’s
acquisitions are largely funded with internally-generated cash.
*In general, an estimated 50% of receivables are collected before the car leaves the shop, with the remaining received in <1 month.
The capital structure is straightforward. Total debt of C$171 million is comprised of bank borrowings (C$33
million), convertible debentures (C$58 million - captured in dilute share count), seller notes (C$68 million) and
capital leases (C$12 million). The company is conservative and the balance sheet is under-levered (<1x) relative to
peers leaving significant “dry powder” (>C$350 million) for acquisitions. Management indicated comfort with net
leverage of ~2x.
Total shares outstanding consist of two components - units outstanding (publicly-traded) and Boyd Group Holdings