Fenix Parts: This Automobile Parts Seller Could Be Headed To The Junkyard

by Sonya Colberg, Senior Editor - 9/10/2015 8:55:45 AM

Fenix Parts (Nasdaq: FENX) resembles the Johnny Cash hit describing the Cadillac put together "One Piece at a Time," from parts he and an auto-worker buddy gradually steal from the assembly line and eventually cobble into a "Psycho-Billy" heap.

It took the determined workers about 24 years to create a weird Caddy at a cost estimated to exceed the price of a showroom model. But Fenix took only four months to roll-up a dozen companies into a money-losing jalopy arguably worth a fraction of its ~$190-million market valuation.

Westchester, Illinois-based Fenix operates like a legal chop shop. The company buys broken-down heaps from automobile auctions, pulls them apart and then sells the parts and scrap metal. It operates more like a junkyard at several locations, where the company buys junkers from individuals. Customers range from body shops and car repair shops to shade tree mechanics and hobbyists.

Fenix has not responded to our request for comment, but investors may read various viewpoints here. Meanwhile, TheStreetSweeper presents the executive summary highlighting Fenix investment risks:

1. Losing Money - Fenix is running in the red. It's almost out of cash.

2. Risky Rollup - The company IPO'd four months ago as a rollup and has already acquired a dozen companies. These rapid acquisitions result in distracted management and accelerated costs associated with buying, integrating and running very different businesses.

3. Directors Flee; Management Overwhelmed - The chief executive apparently lacks experience in the auto parts business and has installed equally inexperienced former co-workers as directors. Those two directors recently departed under rather odd circumstances.

4. Messy Financials - Fenix is also challenged by messy financials, apparent inability to file financial reports on time and a Nasdaq deficiency notice. All may well suppress or kill investor interest in the stock.

5. Dilution Looming - Fenix will likely soon sell stock - ultimately diluting current shareholders' stock. In fact, the Securities and Exchange Commission has already approved the paperwork to sell more stock at any time.

6. Pending Insider Selling - Insiders will be able to sell currently locked up stock beginning Nov. 10.

*Risky Rollup - Running In The Red; Running Out Of Cash

A risky rollup, Fenix acquired its first 11 corporate entities for ~$93 million cash plus about 3 million shares of stock just days after the company's initial public offering in May 2015. The CEO had prepared for that moment with a series of private stock offerings that cost insiders 10 cents apiece for some stock and $10,000 to $13,000 apiece for other stock, which ultimately underwent a 2,000-for-1 stock split.

Fenix had to lower its hoped-for $10 offer price to $8 per share and increase the share count to 12 million shares. Fenix was forced to borrow millions to pay the full $93 million acquisition expense plus a little left over for operating costs.

Fenix soon rapped its own fingers with a rusty wrench once again. It seems the acquired companies began reporting unexpectedly lower revenues - dinged and dented by lower scrap prices.

Fenix Parts most recently submitted, first quarter, financials are shown below:

(Source: Company SEC filing)

So Fenix finds itself operating ~$2.6 million in the red.

And in just the first quarter 2015, the company burned through $2.1 million.

Now, Fenix needs at least $2 million per quarter to pay employees and cover other routine expenses.

But look at its cash position:

Yes, Fenix’s cash has dwindled to ~$148,500.

Alarmingly, that pitiful pinch of cash was reported before the company made yet another acquisition. Fenix inked a deal on Aug. 14 to buy Ocean County Auto Wreckers for $2.6 million cash plus ~half-a-million-dollars-worth of stock.

And – how far away can another stock offering be? – the CEO said he plans to close one to three acquisitions per quarter.

*Frequently Delayed Financial Report Raises Issues, Builds NASDAQ Deficiency Notice Pressure

But cash-poor publicly traded companies are expected to file their financials on time, too. The second quarter financials were due Aug. 14.

Fenix didn’t make it. So Nasdaq notified the company of its short-coming on Aug. 20. Four business days later, Fenix notified investors about the Nasdaq deficiency notice, stating it would file its financials on Sept. 2.

But in a filing dated Sept. 2, Fenix states:

“On September 2, 2015, the Company issued a press release reporting its second quarter 2015 pro forma consolidated revenues and providing an update on its second quarter Form 10-Q filing, which is now expected within the next two business days.”

What happened two days later, on Sept. 4? Nothing.

Fenix did hold a Sept. 3 “investor update” in which CEO Kent Robertson said, “…we are close to completing our second-quarter 10-Q filing. This filing is complex …”

This filing issue is yet another chapter in Fenix’s history of complex, incomplete financial details that managers must repeatedly apologize for in conference calls.

The company did recently tell investors to expect a loss for the second quarter. But how bad?

The clock is ticking. Investors are wondering.

*Management Inexperienced; Directors Flee

It’s always unsettling to see managers leave a company.

Though Fenix has existed less than two years, two of six directors have already fled under curious circumstances.

Directors Richard Kogler and Frank ten Brink were on the board’s compensation committee and audit committee. Mr. ten Brink was even considered the “audit committee financial expert.”

As the sole director at the time, CEO and founder Kent Robertson installed both men as directors well before the initial public offering. The three had all worked for Stericycle – not in the world of recycled auto parts – but instead, in the world of medical waste disposal.

Interestingly, almost the minute Fenix reached the point that it couldn’t submit its financials on time, the company announced both men had resigned from the board.

Fenix issued an odd press release stating: “While Fenix eagerly anticipates the addition of these executives (to the Fenix management team)… Because of an internal Stericycle policy, Messrs. Kogler and ten Brink were required to resign from the Fenix Board, effective immediately.”

Yet investors might wonder why Stericycle would suddenly raise conflict of interest concerns now … nearly a year after the men were named Fenix directors?

After being groomed for management, they’ve missed out on the opportunity to join the executive lineup, here.

One theory is that all those rapid acquisitions have managers running in circles with their hair on fire. There’s no time to thoroughly manage things. No time to finish that pesky second quarter filing.

*Out-Of-Whack Valuation: Competition Rips Fenix

Fenix stock looks to be a much, much worse value than competitors KAR, LKQ, and CPRT. The red shading in the chart below indicates the group’s worst numbers…which belong to Fenix.

                                 

 

(Source: Yahoo Finance (most numbers rounded); FENX revenue is FY 2014 pro forma per SEC filings)

(Note: PEG ratio is price/earnings to growth ratio, indicating the trade-off between the stock price, the earnings generated per share and the company’s expected growth. A PEG ratio of “1” is good.)

Compared with rivals, then, the chart clearly shows:

  1. Fenix has 100 times less cash.
  2. Fenix makes between ~10 and ~65 times less revenue.
  3. Fenix is the only stock offering negative earnings per share.
  4. Fenix is at least ~5 times overvalued, considering its expected growth.

*Conclusion

Amid the over-valuation, Nasdaq pressure, messy financials, fierce competition, odd departures and overwhelmed management sitting atop a risky roll-up business plan, Fenix is about to toss yet another roadblock in front of investors.

Cash-poor Fenix could very well sell stock at any moment if it wants to keep the doors open. With nearly $100 million worth of stock registered to be sold at any time, current shareholders could obviously face tremendous dilution.

And a second dose of dilution waits just around the corner. Insiders’ shares locked up since the IPO will be unlocked Nov. 10, potentially shooting more shares onto the market.

Ah, this cobbled together jalopy of a company would have been enough to make poor Johnny Cash cry in his whiskey.

It’s also enough to toss Fenix in the junkyard and cut its valuation down to about $3.50 to $4 per share. And that is generous.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in FENX and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.