Monday, July 4, 2022
HomeValue InvestingAutomobile Supplier Rollup Gone Unhealthy, Pursuing a Sale

Automobile Supplier Rollup Gone Unhealthy, Pursuing a Sale


Full warning, just like Armstrong Flooring (AFI), this could possibly be a horrible concept, it has vital pink flags and is very speculative.

LMP Automotive (LMPX) is a micro-cap (~$45MM market cap) that got here public in late 2019 with a automobile subscription mannequin the place customers may hire a automobile month-to-month, positioning itself as splitting the distinction between a short-term automobile rental and a standard automobile lease.  LMPX then put a web-based vendor/cellular app enterprise mannequin spin round it to market the inventory.  In 2020, LMPX grew to become a little bit of a meme inventory, briefly buying and selling up alongside different e-commerce automobile sellers like Carvana, however then crashed as they have been unable to supply automobiles economically to run their subscription mannequin.  As a substitute, the corporate pivoted to be a standard automobile dealership rollup enterprise and went on a debt fueled acquisition spree in 2021.  LMPX completed the 12 months with 15 new automobile dealerships and 4 used automobile dealerships throughout 4 states.  On 2/16/22, the corporate mentioned they have been unable to safe new financing for his or her beforehand introduced however not but closed acquisitions (7 of them!) and shortly pivoted to pursuing a sale:

Sam Tawfik, LMP’s Chief Govt Officer, acknowledged, “The Firm intends to terminate all of its pending acquisitions in accordance with the phrases of their respective acquisition agreements, primarily as a result of lack of ability to safe monetary commitments and shut inside the timeframes set forth in such agreements.”

“The Board of Administrators believes that LMP’s present inventory worth doesn’t replicate the Firm’s honest worth. Given the file M&A exercise in our sector and multiples being paid for these transactions, LMP’s Board of Administrators has directed administration to instantly pursue strategic alternate options, together with a possible sale of the Firm.”

The inventory closed at $5.25/share on 2/16, it now trades for ~$4.25/share.

Placing apart terminal worth questions (auto OEMs bypassing sellers, electrical automobiles needing much less upkeep), automobile dealerships are pretty excessive money flowing enterprise and have been huge covid beneficiaries. There’s a lack of provide (nationwide, dealership stock is ~1/third of regular, going to take some time to normalize) that has raised costs and decreased the necessity for automobile salespeople (dealerships have been sluggish to rehire these laid off through the pandemic) as extra folks browse on-line and the low stock has all however eradicated haggling.  Automobile homeowners are additionally holding onto to their automobiles longer creating extra excessive margin service income.  A few of these covid adjustments could also be lasting, many sellers speak about stock being completely decrease as sellers turn out to be extra of a distribution heart and fewer of a spot the place folks stroll the lot to search out the automobile they need, they’ve already selected the specs on-line earlier than going to the vendor.  

There are millions of dealerships throughout the nation, they’re moderately liquid belongings that change arms often (just like why I like REIT particular conditions, the belongings are fungible and there is a giant pool of consumers).  Right here, there are 7 giant publicly traded dealership teams (KMX, LAD, PAG, AN, ABG, GPI and SAH, however solely ~10% of all dealerships) and lots of different giant non-public ones.  The windfall earnings of the previous couple of years has prompted the bigger public gamers to do a whole lot of M&A, rolling up this fragmented market.  Whereas giant dealership teams are thriving, many smaller dealerships are struggling to supply stock and are susceptible to failure, with the intention to press their scale benefits, the large are getting larger.  Awkward great distance of claiming, I do not suppose LMPX can have hassle discovering consumers for his or her dealership belongings, however it’s extra a query of worth.

Given the speedy rollup nature of LMPX, nailing down the valuation causes a little bit of mind harm to work via the financials, here is what CEO Sam Tawfik mentioned within the Q3 earnings name:

Our third quarter annualized run charges excluding the acquisition we closed this quarter, which we count on to be instantly accretive to revenue this quarter are $565 million in income, and $47.6 million in adjusted EBITDA.

The acquisition referenced above is the White Plains Chrysler Dodge Jeep Ram Dealership that closed in October, bought for $19.2MM that was estimated to generate $2.6MM in 2022 EBITDA.

Then within the firm’s annual letter on their web site, Tawfik offers:

We accomplished the acquisition of our contracted White Plains, New York Chrysler Dodge Jeep Ram within the early fourth quarter utilizing roughly $5 million in money from the corporate’s stability sheet, 55,000 shares of frequent inventory and $1.3 million in money from our current credit score facility. This acquisition might be instantly accretive to earnings within the fourth quarter of this 12 months. Because of this 12 months’s acquisition exercise, the corporate at the moment owns 15 new automobile franchises, operates 4 pre-owned shops throughout 12 rooftops in 4 states which generate over $600 million in annualized income.

Later:

 We intend to pay down our current time period debt by roughly $11 million within the fourth quarter of 2021, leading to a stability of roughly $85 million, of which the corporate allocates $53 million to its real-estate holdings and $32 million to its dealership blue sky buy debt. Basically on the present tempo of cashflow era, if we select, the corporate can extinguish its present blue sky debt in lower than a 12 months.

Including it up collectively:

The automobile enterprise does have some seasonality to it, Q1 is often decrease than the opposite quarters, so annualizing Q3 EBITDA is not an ideal run price.  I tried to normalize that and LMPX’s concentrate on tier 2 dealerships (home and financial system imports manufacturers) which fetch a decrease valuation than luxurious within the 4x EBITDA a number of.  Clearly, I am not a automotive sector professional, be at liberty to appropriate or push again, however looks as if there could possibly be one thing right here regardless of all of the dangers beneath.  I purchased a smallish place this week.

Dangers/Purple Flags:

  • Clearly, high of the listing, LMPX went on a loopy acquisition spree in 2021 and could not elevate capital to finish them (credit score situations have tightened barely this 12 months, however nonetheless fairly open).  Most of those offers included a mixture of debt and inventory, struck when the inventory was $15-$17, by the point it got here to shut these transactions the air was being set free of the expansion balloon, the inventory was $7 and the window to boost capital closed on LMPX.  Shopping for dealerships at 7x EBITDA whereas the inventory trades effectively beneath that does not make a lot sense.  It could possibly be nastier than that straightforward rationalization below the hood, however the Q3 numbers look pretty first rate, this can be a mess however was a minimum of money move constructive over the past reported quarter.
  • Tawfik owns roughly 35% of the corporate, he seems to be the only real choice maker and does not appear to have a robust board round him.  There are a selection of associated celebration transactions, none seem overly egregious however in complete they do not look nice, plus in October, Tawfik purchased an organization airplane for himself just a few quick months earlier than all of it fell aside.  His biography contains founding Telco Group which was bought to Leucadia again in 2007 for $160MM and in addition based PT-1 Communications which was bought to Star Communications in 1998 or $590MM.  Presumably he isn’t completely incompetent however may need simply gotten caught up available in the market hysteria final 12 months.
  • Tawfik has been promoting a small quantity of shares often as a part of a 10b5-1 plan, I am not an professional on these insider promoting plans, unsure if they are often cancelled midway via, however it’s not an amazing look if you happen to suppose the inventory is materially undervalued.
  • LMPX studies EBITDA per share versus enterprise worth, that is all the time a pink flag for me as it’s deliberately evaluating apples to oranges.
  • Their present time period mortgage matures in March 2023, so they have somewhat time to get this course of finished and fewer of a compelled sale than AFI.

Disclosure: I personal shares of LMPX

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