DNY59
Introduction
I have written several articles on SA about high performance auto parts supplier Holley (New York stock market :HLLY). The last of them dates back to November when I turned bearish and said net sales and adjusted EBITDA for the full year could to be slightly lower than the new guidance and that I no longer thought the demand for the company’s products was sticky.
Well, Holley’s financial situation keeps getting worse, as the company recently announced. preliminary data which showed net sales of just $153 million to $155 million and adjusted EBITDA of $13 to $15 million for the fourth quarter of 2022. Additionally, the company’s CEO announced he was retiring , and I don’t have high hopes for the 2023 financial guidelines that will be announced in early March. Let’s review.
Overview of preliminary results for the fourth quarter of 2022
In case you haven’t read any of my previous articles regarding Holley, here is a brief description of the company. The company was founded in 1896 and specializes in the manufacture and sale of high performance products for car and truck enthusiasts such as carburetors, fuel pumps, compressors, engine tuners, mufflers, wheels and repair kits. brakes. Holley has made a total of 16 acquisitions in the past three years alone and its brands include Flowmaster, NOS, Scott Drake, Accel and MSD, among others. Holley was listed on has been listed on the NYSE in July 2021 through a merger with a special purpose acquisition company (SPAC) named Empower. When that deal was announced in March 2021, Holley has been described as the “largest and fastest growing platform in the enthusiast-branded performance automotive aftermarket category”. To be fair, the original Holley is long gone. The Holley family left the business in 1968 and the company filed for bankruptcy in early 2008 as the Great Recession sapped demand for discretionary goods. In March 2008, Holley emerged from Chapter 11 bankruptcy with a plan to focus on expanding its emissions control business. However, a major customer, Caterpillar (NYSE:CAT), discontinued a line of truck engines and the company again filed for bankruptcy in September 2009. In 2010, Holley emerged from Chapter 11 bankruptcy for the second time in three years, with sales declining 19.5% year-over-year to $90.2 million in 2009. In 2012, the company was sold to investment firm Monomoy Capital Partners, who then sold it sold to private equity firm Lincolnshire Management in 2013. The latter sold Holley in 2018 to industry player Sentinel Capital Partners who then merged it with Driven Performance Brands.
Following listing in July 2021, the investment thesis was that this iteration of Holley was well-prepared to ride out an economic downturn thanks to sticky demand, as 82% of all car and truck enthusiasts view budgets on recurring parts expenses. Additionally, the company estimated that 64% of its customers frequently trade in their cars and trucks to start new custom vehicle builds and 54% of customers earn more than $75,000 per year (see slide 13 here).
The start of 2022 has indeed been strong, with first quarter net sales increasing 24.8% year-on-year to $200.1 million and it appears the company has not been affected by the global supply chain as adjusted net income climbed 42.4% to $21.5 million. Guidance for the year included net sales of between $765 million and $790 million, as well as adjusted EBITDA of between $186 million and $194 million. And then everything went wrong. In the second quarter, net sales fell 7.1% year-over-year to $179.4 million and Holley said a portion of some revenue was pushed back into the third quarter due to supply chain disruptions. supply and shortages of chips. Net sales guidance for the full year has been reduced from $700 million to $725 million. In the third quarter, net sales fell 12.7% quarter over quarter to just $154.8 million despite supply chain pressures according to the company. relaxed in August and September. Sales of electronic systems products were particularly weak as they fell 15.7% year-on-year to $62.2 million. Guidance for 2022 was again reduced and the company expected net sales of between $695 million and $710 million and adjusted EBITDA of between $118 and $124 million. I think that a change from the CFO in December was a bad sign of things to come and on February 6, Holley revealed that he missed his advice and that its CEO has decided to retire. Preliminary data showed net sales were just $687 million to $689 million, while adjusted EBITDA was $113 million to $115 million. Net loss for the fourth quarter was $17 million to $19 million and Holley complained of supply chain challenges again and is now talking about streamlining operations. In my opinion, a sign that demand continues to be weak in 2023 is that Holley is currently running a winter clearance sale offering discounts of up to 86%.
The company revealed that it had recently implemented an interest rate cap, but that may be too little too late as the weighted average interest rate on borrowings under its credit facility had risen to 6.8% as of October 2. credit facility at the time (see page 31 here) and I fear there will be significant stock dilution in the near future, as the credit facility has a net leverage clause of 5x.
So how do you play this? Well, data from Fintel shows that the short-term borrowing cost rate stands at just 1.03% at the time of writing. However, the company’s market valuation has already fallen by more than 80% in the past year and I think a lot of the negative expectations for the company are already reflected in the share price. In my view, general market sentiment has been driving share price action over the past few months as we have seen market valuation increase by more than 80% between late December and early February despite the lack of news. In my opinion, it might be best for risk averse investors to avoid this stock.
Takeaway for investors
What can I say other than deja vu. Holley went bankrupt 15 years ago due to macroeconomic headwinds and 2022 financial results showed little had changed for the company despite more than a dozen acquisitions in the past few years alone. The company’s CEO has left just as the company’s financial situation is becoming precarious and I think there could be significant stock dilution or another bankruptcy in the cards if something doesn’t change drastically soon. However, Holley’s market valuation is now below $300 million and the stock price has seen wild swings over the past few months, which I believe makes short selling dangerous. It might be best for investors to avoid Holley.