Motorcar Parts Shifting Gears

 | Jun 12, 2013 | 1:30 PM EDT
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I unveiled at the beginning of the year my Winning Value Portfolio for 2013, a group of 10 stocks that I believed could outperform the market.Thanks to a strong market start so far this year, nine out of the 10 securities have logged in healthy advances.

The lone laggard was Motorcar Parts of America (MPAA). It's a laggard no more and over the course of the year, it could turn into a standout. MPAA is a $110 million manufacturer and remanufacturer of aftermarket automotive parts. The company's shares jumped earlier this week by over 12% on news that MPAA was placing a subsidiary into voluntary bankruptcy. The market cheered the news.

A couple of years ago, MPAA acquired Canadian auto parts maker Fenco. The deal proved painful from the beginning. Accounting and audit issues due to the acquisition forced MPAA to delay filings, a fact the market didn't like. Trading for as high as $15 a couple years ago, shares fell to below $4.

Fenco continued to lose money and the acquisition required MPAA to lever up its balance sheet. Earlier this week, management decided that the best thing to do was throw in towel and extract Fenco from its operations. The market cheered the news. For MPAA, the news could continue to get better and shares could find themselves back above $10 by the end of year.

Motorcar's core business, starters and alternators, is doing quite well. Management expects record sales of over $200 million for the fiscal year along with earnings before interest, taxes, depreciation and amortization of $20 million to $30 million. At the current moment, MPAA has an enterprise value of $215 million but some of the debt that is tied to the bankrupt subsidiaries will go with them when they are placed in Chapter 7 bankruptcy. So on an EV to EBITDA basis, MPAA will look very attractive without Fenco, trading at approximately 5-to-7x EV/EBITDA. Dorman Products (DORM) trades at nearly 14x EV. MPAA will also have $19 million in cash.  

The market was right in cheering news of the bankruptcy. But the story will get better for MPAA. The company is better off focusing on its core electrical segment. In addition MPAA will realize some tax loss benefits that should preserve future income.

The net effect is that after years of uncertainty because of Fenco, the market will start to feel a little more certain about the potential of MPAA. The company should begin to benefit from higher multiples as it returns back to its core business.

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