Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for the Inner Circle.

This past week, an Inner Circle asked us about one of the handful of companies (outside of REITs) that has remained an income trust. This auto repair firm has undertaken a program of rapid growth that involves buying up smaller shops and chains. Pat assesses the pros and cons of this aggressive strategy.

Q: Dear Pat: What do you think about Boyd Group Income Fund? Could you please give me your insight and recommendation? Thank you.

A: Boyd Group Income Fund, (BYD.UN on Toronto; www.boydgroup.com), operates 186 auto-body repair centres in western Canada and 14 U.S. states. These shops operate under a number of banners, including Boyd Autobody & Glass, Gerber Collision & Glass, True2Form and Cars Collision Center.

Boyd is growing rapidly by acquiring independent shops and small chains. For example, in July 2012 it paid $4.4 million U.S. for Pearl Auto Body, which operates six repair shops in Colorado.

Thanks to purchases like this, Boyd is now the largest collision-repair shop operator in North America by number of locations and annual sales. The U.S. accounts for 82% of its revenue.

Growth by acquisition is riskier than internal growth for a variety of reasons, but they all come out of the fact that acquisitions carry an above-average chance of unpleasant surprises. When you buy just about anything, you rarely know as much about it as the seller. If a company makes enough acquisitions, it is bound to buy some with hidden or unforeseen problems.

Goodwill and the potential pitfalls of writeoffs

Generally speaking, when one company acquires another as a going concern, it pays more than the value of the tangible assets that it acquires as part of its acquisition. This excess of acquisition price over tangible-asset value is treated as “goodwill” on the buyer’s financial statements.

If an acquisition turns out to be a dud and the acquired operations suffer a plunge in earnings or start losing money, the acquiring company has to write off, against its current year’s earnings, some or all of the value of goodwill that it acquired as part of the acquisition. Writeoffs like these may seem to come out of nowhere when they are announced, and they can spur a steep drop in the acquirer’s stock price.

It generally pays to stay out of stocks in which goodwill represents a big part of their net assets per share. If these companies have to write off just part of that goodwill, it can have a devastating impact on their earnings and stock prices. In most cases, particularly if the goodwill comes from the acquisition of a handful of big, ambitious purchases, the risk often isn’t worth it.

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Slower economy helps Boyd as more old cars get repaired

Boyd is mainly buying small companies. That cuts the risk of a big writedown against its earnings if any one of its acquisitions fails to live up to expectations. Boyd is also purchasing companies that operate in a variety of U.S. states. This helps cut its exposure to any one state or region.

In the three months ended March 31, 2012, Boyd’s revenue rose 31.7%, to $107.4 million from $81.6 million a year earlier. Earnings per unit before one-time accounting adjustments rose 8.3%, to $0.26 from $0.24. The units yield 3.1%.

Boyd’s long-term debt of $37.1 million is a reasonable 20% of its market cap. However, its $60.7 million of goodwill and intangibles is a high 33% of its market cap.

The company’s earnings continue to rise, partly due to the slower North American economy. When unemployment if high, consumers are more likely to repair an old car than replace it with a new one. That has helped the stock rise 33% since the start of 2012.

In the most recent Inner Circle Q&A, Pat looks at whether Boyd’s share price can keep rising. He examines Boyd’s balance sheet to determine the impact writedowns and acquisition are having on the company. He concludes with his clear buy-hold-sell advice on this income fund.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

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Some companies have had great success with acquisitions while others have had great difficulties integrating the companies they acquire. Have you had particularly good or bad results with stocks that have used acquisitions as a way of speeding their growth? Let us know what you think in the comments section below. Click here.