Parts Supply Has Heavy Demand

Journalist's Lament

SAN FRANCISCO -- Shares of Parts.com (MIRM Quote) (formerly Miracom) rose 24.1% to an all-time high of 43 1/4 today after trading as high as 50 1/2.

I mention this relatively small and unknown firm because this story/stock/company serves as a prime example of why so many reporters (not to mention investors) find themselves hamstrung these days. Why, for example, The Wall Street Journal today was filled with (more) stories about why the market is a "bubble" instead of why it's working.

Almost exactly a month ago -- Dec. 16 to be exact -- I met with executives from what was then Miracom, including Shawn Lucas, the company's co-founder and chairman. The company changed its name to Parts.com on Jan. 5.

Lucas seemed decent enough and certainly earnest as he explained the company's plans to use the Internet to take advantage of the "inefficiencies" in the auto-parts business, a roughly $600 billion a year industry.

The executive came into that meeting with a bit of momentum. Like many other B2B firms, Parts.com shares had enjoyed a nice boost, climbing from just under 2 in mid-November to as high as 17 5/8 a week before our meeting. On Dec. 16, the stock closed at 13 1/8, meaning it has appreciated 230% since.

Huge gains by competitor Cobalt Group (CBLT Quote) in the same time frame were a big factor in Parts.com's rise, as was Lucas' Dec. 1 appearance on CNBC.

"That put us on the radar screen," Lucas admitted, expressing gratitude to CNBC reporter Renay San Miguel.

Not wanting to be part of Parts.com's "press packet" was, frankly, one reason I did not write about the company back then. Additionally, it's a bulletin board stock with a thin public float of only 4 million shares -- insiders hold 65% of the 21.2 million total. Writing a "balanced" piece was (and remains) difficult because Parts.com lacks the kind of "infrastructure" journalists usually rely on when doing research, namely Securities and Exchange Commission filings, analyst reports and discussions with institutional owners. Back then (and again today) I was unable to find anyone on Wall Street willing and/or able to talk about this company.

But all -- or some of that -- may soon change. More importantly, it's 230% later on the market's clock, from where I take my cues.

On Nov. 23, the company filed a 10SB-12G with the SEC (more on its contents in a moment), which is essentially an application to move from the bulletin board to the Nasdaq National Market. In an interview today, Lucas said he hopes to get the call-up from the big leagues "early in the second quarter."

Also, a key reason the Sanford, Fla.-based company was in San Francisco last month was to nab its first institutional shareholder and/or its first coverage by a sell-side analyst. In an email last week, Lucas hinted such a development was coming to fruition; today he declined to comment further, citing legal and regulatory restrictions.

When I asked about the stock's most recent ascent, Lucas replied, "It is out of our control." However, the company's marketing campaign -- unveiled yesterday in the auto-industry press -- and anticipation of the full-scale launch of its Parts.com Web site at the National Automobile Dealerships Association's annual conference in Orlando, Fla., on Jan. 24 could be contributing to the heightened interest, the executive mused.

The site is designed to facilitate the "locating, ordering and shipping of auto parts" between dealerships, manufacturers and mechanics, Lucas said. At inception, the site will provide users access to nearly 2 million auto parts and accessories, with plans to ramp up to 5 million parts by year-end.

Other recent developments include the aforementioned name change (can't underestimate its impact) and the signing of more dealerships into the Parts.com system. Libertyville Toyota in Chicago -- Parts.com's first AutoNation (AN Quote) affiliate -- and Hendrick Automotive Group, one of the world's largest privately owned dealerships, already have inked deals. Lucas says more are signing up every day.

The Pudding

That's the good news (or most of it).

The bad news is that as of Jan. 13, the company had signed up 63 "platinum" agreements and 58 "gold" agreements with dealerships, vs. its own estimates that its "patent-pending business model" needs 170 platinum suppliers, 7,000 gold and up to 14,000 silver to "build the infrastructure needed for 'just-in-time' auto parts." (The categories are based on the dealership's size and depth of participation in Parts.com's network.)

Also, in its lone SEC filing, the company disclosed it lost $3.1 million, or 25 cents a share, on revenue of $1.2 million for the nine months ended Sept. 30, 1999.

"A good business model should be profitable," Lucas said at our Dec. 16 meeting, a sentiment he echoed today. The company generates revenue from both the annual fee dealerships pay to participate in the Parts.com network and transaction fees generated therein.

However, Lucas failed to provide a timetable for when the company expects to become profitable.

Additionally, the SEC document, filed Nov. 23, contains a litany of potential risks facing the company, some rote and some not-so-Kyle (or junior). They include (and I'm just listing the subheadings, not the details):

• Our auditors have qualified their report on our financial statements with respect to our ability to continue as a going concern;

• We need additional capital;

• We have a limited operating history and may experience risks encountered by early-stage companies;

• The revenue and profit potential of our business model is unproven;

• We may not be successful in developing brand awareness and the failure to do so could significantly harm our business and financial condition, and;

• [Myriad] risks related to the Internet and e-commerce [including competition from Cobalt and more traditional players such as Reynolds and Reynolds (REY Quote)].

At today's close, Parts.com boasts a market cap of $917 million. Given the risks (and its revenue for the first nine months of 1999), I find it hard to believe that that market cap is justified (or justifiable.)

Then again, I would have said the same thing on Dec. 16.