motorcar parts of america inc. (nasdaq: mpaa)-long · m c i n t i r e i n v e s t m e n t i n s t i...

M c I n t i r e I n v e s t m e n t I n s t i t u t e 1

MCINTIRE INVESTMENT INSTITUTE AT THE UNIVERSITY OF VIRGINIA

Xiao Dong/Jeremy Wang/Rafeh Qureshi|11 /04/2014

Motorcar Parts of

America Inc. (NASDAQ: MPAA)-Long

M c I n t i r e I n v e s t m e n t I n s t i t u t e

AGENDA

• Company •  Stock Overview

Company Overview

• Competitive Business Strategy • High Dividend Paying Nature • Macro Trends Help Company’s Outlook

Thesis Points

Risks

Recommendation

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COMPANY OVERVIEW

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•  Based in California, Motorcar Parts of America manufactures, remanufactures and distributes automobile parts , especially electrical parts, like alternators, starters, steering components, clutches and wheel hubs.

•  MPAA focuses on the DIY and DIFM(do-it-for-me), instead of the OEM(Original Equipment Manufacturer).

•  It sells to large auto retailers like O’Reilly and Auto Zone and also has branded products like Reliance Autozone, Xtreme and Quality-Built.


STOCK OVERVIEW

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Current Price: 25.72 52 week: 5.75-27.49 Vol/Avg.:0.15M/0.23M Mkt Cap: 390.21M

P/E: 12.36 EPS(ttm): 2.11 Shares: 14.94M Inst. Own: 63.80%


PRODUCT CATALOG

Rotating Electrical

Parts Hub And Bearing

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THESIS POINTS #1: STRONG OVERALL PRODUCT LINE

2#Macro Trends Help Company’s

Outlook

3#Solid Financials

1# Strong overall

Product line

Good prospect for core

business part

Significant value adding

wheel hub business

Exciting future new

product line

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THESIS POINTS #1: STRONG OVERALL PRODUCT LINE #1.1: GOOD PROSPECT FOR CORE BUSINESS PART

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•  Established branded products and private label parts(Quality-Built, Xtreme-Heavy Duty , Xtreme-Power Sports , Pure Energy, Reliance Automotive, X-Amps)

•  Relatively low price-point

• Encouraging macro trend(Tail Wind) The current population of vehicles in North America is approximately 247 million and the average age of these vehicles is approximately 11 years.


THESIS POINTS #1: STRONG OVERALL PRODUCT LINE #1.2: SIGNIFICANT VALUE ADDING WHEEL HUB BUSINESS

•  Question: What is wheel hub? •  Answer:

Wheel hubs are essentially what lug nuts are bolted onto within your wheel, located between brake rotors and the axle.

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MPAA has only sold products within the category for 2 quarters, but it has seen its business ramp to $8.8 million in FY14Q3 with an annual run-rate of $45 million.



1.2#: SIGNIFICANT VALUE ADDING WHEEL HUB BUSINESS(MISPERCEPTION)

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ABS/ESP Shipment in North America (2003-2016F)

ESP vs. ABS



1.2#: SIGNIFICANT VALUE ADDING WHEEL HUB BUSINESS(MISPERCEPTION)

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� The wheel hub assembly contains the anti-lock braking mechanisms.

� Most cars need wheel hub assembly replacements after 150,000 miles of driving. The average new car today will last approximately 11.4 years, or easily over 150,000 miles.

� Relative ease of changing and fairly-low priced(almost always under $100)

�The size of this category is approximately $1.2 billion in the North America

"So conservatively, I estimate 20% growth the next year in the wheel hub business on a minimum. I think we can beat that significantly.“-CFO David Lee


THESIS POINTS #1: STRONG OVERALL PRODUCT LINE 1.3#: EXCITING FUTURE NEW PRODUCT LINE

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From the Q3FY14 conference call: "Again, we expect to announce a new product line in the next fiscal year. We are optimistic and comfortable that that will happen. As far as what it will be, we won't release that until we actually get into the business." - CEO Selwyn Joffe

Catalyst


THESIS POINTS #2: MACRO TRENDS HELP COMPANY’S OUTLOOK

1# Strong overall

Product line 3#Solid

Financials

2 #Macro Trends

Help Company’s

Outlook

Auto industry changes provide

promising outlook

Climate Change Provides

expectations of higher sales

Growth reflected in

company sales

Interpretations of trends create misperceptions

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THESIS POINTS #2: MACRO TRENDS HELP COMPANY’S OUTLOOK #2.1 AUTO INDUSTRY CHANGES PROVIDE PROMISING OUTLOOK

•  Car longevity (in miles driven) up 100% since 1960-1970s (100,000 miles vs 200,000 miles) •  Life of a car in years: ~11.1 now vs ~6.75 in 1930s

•  Miles driven per year increasing.

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•  After recession, auto Sales finally looking strong. •  Sales up 50% from 2009 and expected to grow at least 4% to 16.2 million by 2014 •  “U.S. automotive suppliers are reasonably well positioned after nearly a decade of steady decline.”

–  The U.S international trade administration

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THESIS POINTS #2: MACRO TRENDS HELP COMPANY’S OUTLOOK #2.1 AUTO INDUSTRY CHANGES PROVIDE PROMISING OUTLOOK


THESIS POINTS #2: MACRO TRENDS HELP COMPANY’S OUTLOOK #2.2 GROWTH REFLECTED IN COMPANY SALES

•  As number of vehicles grows, motorcar parts Benefits from increasingly Strong sales •  MPAA net sales grew $155,109,000 in 2012 to $181,987,000 in 2013

– a 17.33% increase. •  Assets of company: $ 297,340,000 - $ 364,969,000 (81.5%

increase) in latter half of last year.

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THESIS POINTS #2: MACRO TRENDS HELP COMPANY’S OUTLOOK #2.3 CLIMATE CHANGE PROVIDES EXPECTATIONS OF HIGHER SALES.

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US suffered above normal snow. è Increased

demand for car care

è Increased

emphasis on the company



“Prior to a disaster, many individuals perceive its likelihood as sufficiently low that they argue, “It will not happen to me.” As a result, they do not feel the need to invest voluntarily in protective measures”

» Howard Keunreuther, Wharton Business School

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THESIS POINTS #2: MACRO TRENDS HELP COMPANY’S OUTLOOK #2.4 INTERPRETATIONS OF TRENDS CREATE MISPERCEPTIONS

•  Bounce-back of sales of cars puts emphasis on cars.

•  Unclear which makers will do better next period – widely disparate makers such as GM Toyota and Nissan seem equally auspicious. Variance of growth last year: 35.836

•  Companies like MPAA pass by under the radar, despite having experienced higher growth than any of the “big eight.”

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•  Outcome of MPAA independent of who wins auto makers’ battle.

•  Auto part companies don’t have much variability in their

products. •  VAR and reviews online prove that to be false

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•  “We truly use alternators, starters and clutches from motorcar parts... I think they may make a contract with our company to sell only their products.... Those are durable and really normalized parts…I feel like they work great since we hardly get customers coming back complaining about the same problem...”

»  John O’Reilly’s Auto Parts, Waynesboro

•  “...I heard they are making hub assemblies and I'm super looking forward to their products b/c we are close partners and they have great reputations...”

»  Chris - district manager Auto Zone, Charlottesville:

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THESIS POINTS #3: SOLID FINANCIALS

1# Competitive Business Strategy

2# Macro Trends helping

the company 3#Solid

Financials

Strong Management

Team

Gain and potentials from bankruptcy of

Fenco

Promising Financials

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THESIS POINTS #3: SOLID FINANCIALS #3.1 STRONG MANAGEMENT TEAM

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Diverse Leadership in the Management Team --- Combined 170 yrs of auto industry experience

•  CEO and President of MPAA. •  He has been in MPAA since 1995 from served as a

consultant. CPA possessed. •  Before that, he served as CEO in different industries,

including consulting, network communication, and entertainment.

•  CFO and VP of MPAA. •  Experienced consultant and public accountant previously.

•  VP of Law, General Counsel and Secretary of MPAA. •  Experienced Lawyer. •  Graduated from Wharton and Harvard Law School.

Selwyn Joffe

David Lee

Michael Umansky


THESES POINTS #3: SOLID FINANCIALS #3.1 STRONG MANAGEMENT TEAM

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THESES POINTS #3: SOLID FINANCIALS #3.2 BANKRUPTCY OF FENCO

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•  MPAA acquired Fenco (Fenwick Automotive Products) in May of 2011.

•  Although got exposure to undercar products, the high liability and bad management team in Fenco RUINED the financials.

•  MPAA lost $135.3M & $62.8M in FY13 and FY12.


THESES POINTS #3: SOLID FINANCIALS #3.2 GAIN AND POTENTIAL FROM THE BANKRUPTCY

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Debt Isolation

Visible of the Core

Value

Continuous EPS

Surprise

Average Beat of 43%

Strong MOMENTUM of continuous beating EPS in the following years


Previous $125M

CREDIT Facility w/

10.5% interests

$95M term loan

$30M credit revolver

New Structure of blended interests of

6.4%

$4M SAVINGS

THESES POINTS #3: SOLID FINANCIALS #3.2 GAIN AND POTENTIAL FROM THE BANKRUPTCY

-  Overturn of the Capital Structure

-  Also, realize $30M tax benefits in next 2-3 years to offset its tax payments on earnings.

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THESES POINTS #3: SOLID FINANCIALS #3.3 PROMISING FINANCIALS

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THESES POINTS #3: SOLID FINANCIALS #3.3 PROMISING FINANCIALS

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•  So conservatively, I estimate 20% growth the next year in the wheel hub business on a minimum. I think we can beat that significantly. –CFO David Lee

•  This could make the hub and bearing business worth $55-$65M.

•  Easily achieve $1.9 per share, beating the estimate of $1.37 in FY14 and $1.67 in FY15.

•  Still underestimate the true earnings power since it includes the tax rates where the company holds 33.83M (9% of Mkt Cap) Cash.


RISKS

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•  Economy recovery may spurs auto buying and thus lower demand for replacement parts.

•  No significant evidence yet, but millennials moving to cities might lower usage of vehicle. •  MPAA still retains big financial leverage. Debt leads to fragility and small cap companies with less access to capital markets should avoid becoming fragile.

•  Due to its global exposure, it’s suffered from interest rate risks and exchange rate risks.


RECOMMENDATION

•  Immediately initiate a long position at 3%.

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QUESTIONS

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motorcar parts of america inc. (nasdaq: mpaa)-long · m c i n t i r e i n v e s t m e n t i n s t i...

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