by Daniel Putnam | January 15, 2013 8:45 am
It’s the age-old question for the owners of older cars: When the cost of a repair begins to approach the value of the car itself, is it best to pay for repairs, do the fix on your own or just buy a new vehicle?
In the post-recession years, the economics of this decision changed. With job-related uncertainty high and consumers tapped out on the debt front, the hurdle at which it made sense to address car trouble with a new purchase rose significantly. More car owners then opted for the second choice: do-it-yourself repairs.
This trend was reflected in both slowing auto sales and stellar returns for auto parts retailers. From Nov. 20, 2008, through April 30 of last year, shares of AutoZone (NYSE:AZO) rose 345%, while Advance Auto Parts (NYSE:AAP) and O’Reilly Automotive (NASDAQ:ORLY) tacked on 262% and 380%, respectively.
Not a bad run.
In recent months, however, the economics of the equation have begun to change yet again. The job market has improved modestly and consumers have paid down debt, once again lowering the hurdle needed to purchase a new car instead of doing a fix. In a note released on Dec. 27, ScotiaBank analyst Carlos Gomez wrote:
“U.S. household balance sheets have improved significantly and are currently at the healthiest level in a decade. Households have deleveraged by a trillion dollars over the past four years, leaving them in good shape to replace many of the clunkers still on the road — the average age of the U.S. fleet now exceeds 11 years for the first time on record. The average age of the U.S. fleet has historically been 9 years or less.”
The result, Gomez predicts, is that global auto sales will rise 4% this year.
This trend is already playing out in the shares of the automakers. Ford (NYSE:F) and General Motors (NYSE:GM) have surged 56% and 60%, respectively, since the July market low, while Honda (NYSE:HMC) and Toyota (NYSE:TM) have each gained more than 25% since mid-November amid the collapse in the Japanese yen.
The good news regarding auto sales has been bad news for the auto-parts retailers. Since April 30, all three stocks have been hit hard: AutoZone has slid 13%, while Advance Auto Parts and O’Reilly are off 21% and 17% — all in a strong tape. Tellingly, the repair companies Monro Muffler Brake (NASDAQ:MNRO) and Pep Boys (NYSE:PBY) also have lost ground since mid-2012.
Does that make that make the auto-parts retailers a buy? The table shows a growth/valuation profile that offers investors a reasonable entry point. In addition, the extent of the auto-parts retailers’ recent underperformance creates an opportunity for the group to play catch-up if the broader market can keep rising.
|1-Yr EPS Growth
|Advance Auto Parts||12.9||+9.4%||-7.0%|
Still, the main story that propelled these parts retailers in recent years was that they could provide consumers with a way to postpone an even greater expense, making them “recession-proof.” This theory was borne out by both the companies’ results and their stellar market performance. Now, with that pillar of support largely removed from the equation due to the improvement in economic conditions, institutions no longer have a clean “story” to tell their investors. Lacking this engine of performance, the auto-parts companies are unlikely to provide anywhere near the returns they did in recent years.
The verdict: Auto parts retailers have lagged, but that doesn’t mean the stocks are ready to recapture their post-recession glory. For those looking to make a play on trends in the auto space, the better bet might be to go where the growth is — the auto manufacturers themselves. Although the group is over-extended and ripe for a pullback, the manufacturers appear a better opportunity to “buy the dip” than AutoZone and its peers.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
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