New chief finds many bumps in Keystone Automotive's path.

IN the past four months, Wall Street has bludgeoned Keystone Automotive Industries Inc.--not once, but twice--as investors staged a hasty retreat.

In mid-October, the Pomona-based seller of auto body replacement parts suspended sales of aftermarket headlamps for the Ford Taurus and General Motors Pontiac Grand Am because they didn't comply with federal standards.

Morgan Keegan analyst John Lawrence cut his rating to "market perform," which contributed, in part, to a 24 percent plunge in the stock.

Two months earlier, Keystone had reported a first-quarter profit shortfall that sparked an initial round of selling. Shares fell 26 percent over a six-day period in early August as many hedge funds sold out.

"There was a period when the stock was dropping 4 percent a day without stopping and a lot of clients were calling and asking why the company was so quiet," said Kevin Tynan, an analyst at Argus Research in New York.

Part of the problem may have involved a transition in Keystone's executive ranks. The missteps came just as Charles Hogarty, Keystone's colorful, longtime president and chief executive, announced his retirement. That's left the new chief executive, Richard Keister, with some repair work to do--and at times, he hasn't had the answers to questions investors asked on conference calls.

"We have a long road to travel before we can call ourselves world-class," Keister, the former president of Delco Remy International's Aftermarket Group, said on Keystone's second-quarter conference call last month.

He is beefing up the top ranks by hiring two vice presidents--Charlie Fischer as head of supply chain management and Barney Gerschen to focus on development and recruiting. "The business wasn't in such great shape when he inherited it," Tynan said.

Keystone isn't a stock for investors with weak stomachs. Shares have gyrated wildly in the past few months, trading as high as $29 in July, and as low as $17.83 in October.

Over the past eight years, Keystone has been on an acquisition binge, absorbing 35 separate companies to become a major distributor of generic auto parts for collision repairs, including bumpers, grills, lights, wheels and paints. The company has 3,400 employees and 127 distribution facilities.

That growth resulted in a company running on 13 different computer operating systems. Keystone has been trying to create a common IT platform for more than three years.

Most frustrating to investors, Keystone has taken several charges over the past few quarters for its systems upgrade, which is under way. "From the investment community standpoint, you get a bit leery heating about the IT issues every quarter," said Tynan.

John Palumbo, Keystone's chief financial officer, said the IT system has better features that will help the company comply with Sarbanes-Oxley reporting requirements. Keystone also wants to launch a Web site that will allow auto body shops to order parts online.

"We've devoted a lot of money, capital and people resources to this IT conversion and it's gone pretty well, though we've had some bumps along the way," he said.

Keystone reported an 11 percent drop in second quarter net income, to $2.4 million, compared with $2.7 million for the like period a year earlier. Sales rose 9.2 percent to $127.4 million.

Keystone has been hit with a number of additional costs, including a fire at a distribution facility in Canada, losses suffered in Florida, Louisiana and Alabama because of recent hurricanes, and higher fuel costs for the vehicles that deliver thousands of parts to body shop customers every day.

Keister said one of his goals is to bring operating margins back to historical highs above 8 percent, since they have dropped under 5 percent in the past few quarters. The company also will continue to make acquisitions to support top-line growth.

One possible upside for Keystone is a court case involving the nation's No. 1 auto insurer, State Farm. The insurer was ordered to pay $1.2 billion in damages in 1999 for allowing the use of non-original equipment manufacturer parts in car repairs. Last year, the Illinois Supreme Court agreed to review State Farm's appeal. If a decision favors State Farm, Keystone could benefit.

Keystone Automotive Industries Co.

[GRAPHIC OMITTED]

YEAR (March 26)                 2004     2003

Revenue (millions)            $501.1   $439.1
Total Expenses (millions)      473.8    416.2
Operating Income (millions)     27.3       23
Net Income (millions)           17.7     14.7
Earnings Per Share             $1.16    $0.99

Quarterly Net Income (millions)

[GRAPHIC OMITTED]

SUMMARY

Business: Distributor of aftermarket auto body parts
Headquarters: Pomona
CEO: Richard L. Keister
Market Cap: $361.6 million Dividend Yield: None
Total Liabilities: $40.2 million P/E Ratio: 20.8
Long-Term Debt: $0

Staff reporter Kate Berry can be reached at [phone], ext. 228, or at [e-mail].