The Best and Worst
Stocks of 1997
Loser -- Boyds Wheels
(Nasdaq: BYDS) Price -- $1 1/2
The Company's Biz. Boyd Coddington is a great American success story. A former machinist at Disneyland, Coddington has spent the last 15 years making hot rods, like the one that appeared in ZZ Top's "Legs" video. Even Mattel has licensed Coddington's designs for its toy cars. Boyds Wheels began as a side business that filled orders for the custom wheels that appeared on his cars.
Today, the company primarily designs and manufactures high-quality wheels and related products for the specialty automotive aftermarket. Its billet wheels, cut from solid pieces of aluminum, sell for $1,000 to $7,000, while its cast aluminum wheels go for $700 to $1,000. The company also makes motorcycle wheels, steering wheels, and aluminum accessories. Boyds has also picked up a following among Harley-Davidson enthusiasts. It has also introduced the Ultra Violet brand of car care products and a line of Boyds sportswear. These products are sold through national tire and performance retailers, warehouse distributors, and mail order outlets.
The Story. The company hit a speed bump in February when it announced a fourth quarter loss, cutting the stock price in half. Sales were up 37% in the quarter, but that was below the 53% growth rate seen overall in FY96 and significantly less than the company expected. It also wasn't enough to make up for the higher fixed costs resulting from the quarter's 50% expansion in plant capacity.
The bad news has kept rolling in. In the first three quarters of this year, sales have declined by 35%, 47%, and 37%, respectively. Combine declining sales with higher fixed costs and it becomes clear why Boyds Wheels has had a disastrous 1997. The company lost $0.32 per share in the first quarter, $1.08 in the second, and $0.55 in the third. Negative gross margins were exacerbated by a half-million dollar loss caused by a customer's bankruptcy plus a one-time write-off of $1.8 million for sales reserves of motorcycle products, reduced value of capital equipment, and other matters.
This blowout was caused by a shift in consumer demand from two-piece to one-piece wheels and by the company's weak offering of new designs. Sales of two-piece wheels have fallen by $7.2 million this year, accounting for most of the company's $8.7 million sales shortfall. The firm also started selling its motorcycle accessories direct to dealers rather than through distributors, but lost out on sales because it couldn't meet the fast delivery required. The same problem affected its private label wheel sales. Other problems included lackluster penetration of new markets and, as the company has put it, "the lack of a fully integrated sales and marketing plan."
Basically, everything that could go wrong did, and by September 30, Boyds was in violation of its loan covenants and in danger of bankruptcy. The CFO resigned in September and founder/Chair/CEO Coddington left everything but his board seat on October 31.
How Could You Have Avoided This Loser. Based on estimated FY97 earnings of $1.10 per share and an industry growth rate of 12%, Boyds looked fairly priced back in January. Given its own exceptional 1996, it actually seemed undervalued. But small companies often run into growing pains, and a transition to a larger manufacturing facility should always be cause for concern. For one thing, it may distract management from normal operating issues. Also, it may indicate a market top -- founders are sometimes most optimistic at precisely the worst time. If the higher sales follow, fine. If not, the company has acquired huge overhead expenses. High fixed costs can also be a problem in any industry that relies on fashion trends, and Boyds is basically in the fashion end of the auto biz. The fourth quarter loss on falling sales growth should have been a double-whammy wake-up call that future results might be squeezed from both ends.
The Future. Coddington is out as CEO, though he remains as a design consultant. Director Gardiner Dutton is now in. Dutton has 30 years of experience in manufacturing and led a one-year turnaround at defense subcontractor Bowmar Instruments earlier in the decade. He also has a background in mergers and acquisitions.
The future for Boyds, though, appears challenging. The company has reduced personnel, cut the salaries of management, sold or subleased underutilized machinery, and introduced purchasing and inventory controls -- all of which should reduce the company's break-even point in future quarters. The decline in revenues also began to slow in the third quarter, as sales of new one-piece wheels picked up. The only analyst still covering the company expects Boyds to earn a nickel a share next year. Still, that assumes that the company can scare up some new financing pronto. At the end of the third quarter, it had just half a million dollars in free cash but $8.8 million in current loans and $4.2 million in accounts payable, good for a working capital deficit of over a million bucks. The company is operating on thin ice, and unless it can find some traction soon, it may fall through.
-Louis Corrigan (TMF Seymor)
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