Temporary Setbacks For Fenix Parts Don't Change BMO's Long-Term View

Fenix Parts Inc FENX reported loss of $1.97 per share for 1Q16.

BMO Capital’s Joel Tiss maintains an Outperform rating on the company, while lowering the price target from $8 to $7.

1Q16 Results

“The results were noisy, with multiple adjustment items burying a rather improved quarter, as the Recycle OE business revenue grew by 9 percent organically q/q and 4 percent y/y,” Tiss mentioned.

The company’s gross margin came in at about 37 percent, as compared to 29 percent in 4Q15, while adjusted EBITDA improved by almost $0.2 million.

“While the growth trend is notable, it seems to us that the lower share price, which triggered a $43 million goodwill impairment, and the $7 million inventory write-down have put strains on the company’s borrowing base,” the analyst stated.

Related Link: Fenix Parts Reports Q1 EPS $(1.97) Does Not Compare To $0.01 Estimate, Rev. $ 32.79M vs. Est. $31M

Management indicated that in order to rebuild borrowing capacity, the company might push out future acquisitions to 4Q16 at the earliest, focusing instead on growing the business organically to enhance profitability, cash flow and the asset base.

Temporary Setback

“Despite the temporary setbacks the company is facing, we believe the long-term growth thesis for Fenix remains intact and the fact that revenue and margin improved in an extremely difficult industrial environment shows the company’s resiliency and growth potential,” Tiss pointed out.

However, the analyst expects to stock to remain range bound in the low-to-mid single digits over the next six months, until Fenix Parts is able to deliver higher EBITDA and free cash flow, and demonstrate better execution.