Shares of well-known but small automotive repair player Midas (MDS) have been on a tear since bottoming in early August. They are up more than 80% since then, and recently hit a 52-week high. Truthfully, though, it's been painful at times owning Midas, a company that I've compared to a character in one of the many great Seinfeld episodes. The problem, which is not uncommon in value land, has been that what looks great on paper does not always translate into operating performance, or recognition by the market. This company has been the epitome of that issue. Some might even call it a "value trap."
What drew me to the name a couple of years back was its combination of assets and possibilities. On the asset side, the company owns more than 200 properties, which is fairly compelling given the company's $243 million enterprise value. On the possibility side, in the midst of a recession, when few were buying new cars, it seemed plausible that the auto repair business would flourish. Consumers may not have had the money to buy new, but at some point they would have to repair their current autos. With cars averaging about 10 years of age at the time, it made sense to believe that the repair shops would be busy.
That was a great theory, and it was actually valid -- just not so much for Midas. While other names, such as Monro Muffler Brake (MNRO), saw revenue jump 45% and net income more than double between 2008 and 2011, Midas did not materially participate in the sector's rally. In fact, during the same period, the company's revenue rose an anemic 8%, and the bottom line fell each year. While Monro stock soared, Midas continued to slide.
Since August, however, it has been a different story, and Midas has soared. That run, however has been courtesy of the company's willingness to explore strategic alternatives, with the hiring of JPMorgan. Furthermore, GAMCO Investors increased its stake in the company to 24.4%. Evidently, the firm might want to own more, but there's a poison pill that limits certain institutional holders from owning more than 24.5%. To that end, GAMCO will reportedly be submitting a shareholder proposal at the 2012 shareholder meeting to remove that poison pill. Here's where the story could get interesting -- that shareholder meeting may be well worth attending.
Meanwhile, it appears that business has been improving at Midas, and the past two quarters have resulted in positive earnings surprises -- although it's perhaps inaccurate to call them "surprises," as just one analyst is covering the company. Midas is expected to report fourth-quarter earnings results as early as today, and expectations are for revenue of $43.26 million, and earnings per share of $0.07.
This situation may be coming to a head in the next few months. Even my patience is wearing thin.