Tale of Two Car Companies Reads Like a History Lesson.

HISTORIANS say the real money was made not by gold miners in the California Gold Rush, but by suppliers. Every miner, of which there were several hundred thousand by 1854, needed food, clothes, and most importantly, equipment. Store owners prospered during the Gold Rush era, but many miners died broke.

Maybe there is still a lesson in that, or at least one would think so from watching the stock of venerable auto-painting shop Earl Scheib Inc., of Beverly Hills, and automotive body-repair industry supplier Keystone Automotive Inc. of Pomona.

It seems a modern-day case where the supplier is better positioned than the end-user.

Scheib, the car painter with 155 locations (a number that is shrinking), has for years been duller on Wall Street than a primer coat. Last week, Scheib traded on the AMEX in the $2-per-share range. Investors who bought in for $12 back in 1992, or even $8 back in 1995, have received quite a waxing.

By contrast, supplier Keystone Automotive is posting record highs, even in a down market. Last week, Keystone Automotive traded in the $14 range, near its 52-week-high, and well up from under $5 a share late last year.

Of course, what usually wows investors -- except during investing manias -- is earnings. Lately, Scheib hasn't had any. In fact, Scheib painted its annual reports in successively deeper shades of red in its last three years.

For the year ended April 30, the company reported a loss of $4.8 million, ($1.10 a share), compared with a loss of $2.1 million (48 cents) the year before. Revenues were $55.1 million, down from $56.4 million. Same store sales have been flat-to-down due to lots of competition.

Meanwhile, Keystone Automotive is rebounding from what appears to be short-term bad news. Keystone was wrecked to under $5 a share back in October 2000 on news that an Illinois state court ruled that automobile insurers faced liabilities if they specify auto repairs using "non-OEM" (original-equipment manufacturer) parts.

Behind the thrust of the ruling was the idea that non-OEM parts were inferior, or even posing a danger to drivers. The state court ruling was poppycock, said John Palumbo, Keystone's chief financial officer. Keystone equipment and parts are just as good as OEM, and substantially cheaper, he said.

Auto insurers, including Nationwide and Farmers Insurance, are already returning to Keystone Automotive parts, Palumbo said -- even in the face of the state court ruling, although parts have to be of equal quality to OEM. Palumbo expects the state court ruling to be overturned, and it looks like Wall Street agrees, given Keystone's surging price.

Keystone has posted generally good numbers in recent years, although for the year ended March 30 it only broke even after sales slowed in the wake of the ruling in Illinois. For the first quarter ended June 29, net income was $2.1 million (15 cents, including an accounting gain of 2 cents a share), compared with $1.5 million (10 cents) for the like period a year ago. Sales rose to $91.5 million from $86.6 million a year earlier.

There are other circumstances that separate Scheib from Keystone, and they harken back to the days of the Gold Rush. Scheib competes with thousands of auto body and paint shops, including Maaco Enterprises Inc., ABRA Auto Body & Glass Inc., and many mom-and-pops.

Keystone Automotive, by contrast, is the only national supplier of paint and related products to the auto repair industry, and it is back on the acquisition path it followed from 1996 through 1999. Keystone is five times larger than its nearest competitor, Palumbo said.

If sales ramp up at a rate of 7 percent to 10 percent per year, Palumbo said Keystone Automotive profits could rise at double that rate. With a recession on, body shops and auto insurers are looking for less-expensive non-OEM parts, and drivers are going to hold onto their cars longer. "We are not recession-proof, but we are recession resistant," Palumbo said.

Company officers at Scheib could not be reached for comment last week. In a recent press release, the company announced it will close 41 shops over the next three years, and concentrate Scheib operations in the Southwest.