Thought a little review of the article that appeared on The Street.Com might be good right about now. Back to lurking.
Albert
Subject: APCO Automobile Protection Company
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To: +Michael Vitas (500 )
From: +Albert Martin
Monday, Dec 15 1997 6:49PM EST
Reply # of 767
GUYS...new investor here. You folks have probably already seen this from
"TheStreet.com" but I thought I would paste here anyway This is from James Cramer's
website. He is a very frequent visitor on CNBC's "Squawkbox". Hope its interesting.
Albert
With APCO's
warranties
currently carried
by a fraction of
the independent
car dealerships
in operation,
investors and
analysts say
there is huge
potential for
growth.
$10 Store: Automobile Protect
By Suzanne Kapner
Staff Reporter
11/28/97 3:32 PM ET
Wayne Huizenga and his supercenter gang may think they've
locked up the used car market, but thousands of independent
dealers are fighting back by offering certified warranties on
second-hand cars.
Automobile Protect (APCO:Nasdaq), an Atlanta company,
is arming some of the 20,000 independent dealerships in this
country, and fueling its own growth in the process.
Last year APCO, which is a tiny player in the $5 billion
warranty market, launched a product called Easy Care
Certified, which provides limited warranties on used cars.
Cars must pass a rigorous inspection before dealers can sell
the certified warranty on a used vehicle -- a process that
benefits both consumers and dealers, as it cuts down on
lemons from the market.
"Used cars are becoming a very profitable segment of the
business for car dealers," says Anthony Levinson, APCO's
chief financial officer. A recent New York Times article noted
that the used car business is benefiting from certification and
warranty programs as well as from a flood of better quality
cars as leases expire on vehicles that are still in good
condition.
APCO's certified program plays right into this booming
market. "Easy Care is fueling our growth in 1997 and years to
come," says Todd Atenhan, investor relations director for
APCO. "And it's helping dealerships compete against
superstores" like AutoNation, owned by Huizenga, and Car
Max, owned by Circuit City (CC:NYSE).
Stephen Wing, an analyst with Raf Financial in Denver,
Colo., who rates APCO a buy, says the Easy Care Certified
program places smaller dealerships on a level playing field
with supercenters. "That's causing smaller dealers to take a
serious look at the product." Wing has a 12-month price
target of 10, based on earnings per share of 40 cents next
year. His firm has not performed underwriting services for the
company.
With APCO's warranties, including an Easy Care product for
new cars, currently carried by a fraction of the independent
dealerships in operation, investors and analysts say there is
huge potential for growth. Atenhan says the company intends
to increase its market share from 1% to 3% of the total
warranty business by signing up both independent and
franchise dealers and introducing new products. In the past
nine months, APCO added 17 dealers to its base of 1,000.
But Levinson says APCO is not just the champion of
independents. The company wants a slice of the supercenter
market, too. It had negotiated with AutoNation to handle its
warranty business, but a private firm with an ownership stake
in the supercenter won the contract. APCO has also been
actively soliciting franchise firms that operate several
dealerships. The company derives about 12% of its $67
million in annual revenue from exclusive contracts with
Honda and Acura dealers, for instance. Levinson says
APCO is currently doing business with a publicly traded
industry consolidator, but declined to disclose the firm's
name since a contract is still being negotiated.
As for new products, APCO recently introduced a warranty
for recreational vehicles. "That could drive some new major
contracts before year end," says Gregg Hillman, an analyst
with First Wilshire Securities Management in Pasadena,
Calif., which owns 550,000 shares of the company.
Hillman and First Wilshire's portfolio manager, Fred Astman,
say they like APCO because it is undervalued compared with
competitors, it has a robust earnings growth rate and it's a
low risk bet.
APCO is expected to increase earnings by 68% this year to
32 cents a share, according to First Call. The company's
stock closed at 6 Friday, placing APCO's current forward
12-month P/E at 18. Furthermore, its price-to-sales ratio is
0.73. (This measure usually denotes value when less than
1.0.) In comparison, Warrantech (WTEC:Nasdaq), another
warranty company, is trading at 26 times this year's
earnings.
"One of the beauties about APCO is there's no significant
risk," Wing says. APCO markets and administers the
warranties, but insurance companies pay the claims. That
spares APCO from the tricky process of setting aside loss
reserves, while allowing the company to retain control over
paying claims.
"We make the decisions of what to pay and to whom,"
Levinson says. "Then we get the funds from the insurance
company. When you don't have control over paying claims,
that will kill you."
That loophole nearly did kill APCO three years ago. At the
time, the company only marketed the warranties, and the
insurance companies did the rest. A problem arose when one
of APCO's insurance agents, Prudential Reinsurance, was
bought by Everest Reinsurance (RE:NYSE). Everest
refused to pay APCO's clients. While litigation is still
pending, APCO has since paid those claims and took a
write-down of $875,000 in the fourth quarter of 1996.
As a result, APCO's contracts with insurance companies are
airtight today, Levinson says. "The only way they can break a
contract is if we breach our fiduciary duties," he says.
Another way APCO minimizes risk is by paying
commissions to its 150 sales agents only after a contract is
sold. The average price of contract ranges between $900 and
$1,100.
Hillman of First Wilshire says the entire warranty industry
has cleaned up its act after a shakeout in the early '90s saw
several firms file for bankruptcy. "At one time the business
was totally unregulated," he says.
Today, Hillman says, the major risk for a company like
APCO is being a small player in a large market. APCO must
compete not only with competitors but also with
manufacturers that offer factory warranties on new and used
cars. On the upside, APCO's petite size could make it a
potential acquistion for a larger player.
Levinson says APCO is carving its niche in the higher-priced,
better-service end of the market. The company boasts of
short waits on its claims hotline as well as in-depth training of
dealerships.
For now, the market seems large enough for players of all
size. Hillman says he likes the industry so much that he also
owns 300,000 shares of Warrantech, one of APCO's
competitiors. But it's APCO, he says, that is "very much
undervalued
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