CHICAGO — While the rest of the automotive world is shaky, investors see a “safe haven” in the aftermarket, one high profile analyst reports.
Tony Cristello, vice president, BB&T Capital Markets, says people have to fix their cars, and because they aren’t buying new ones, parts continue to be needed. Also, there is growth in aftermarket because people are keeping their cars longer, he notes during his presentation “The Investor’s View of the Aftermarket” at the Global Automotive Aftermarket Symposium (GAAS).
According to data Cristello shared during his presentation, auto parts sales dropped and recovered from August to October 2008, while total retail sales dropped from August to December, with a slight pick-up in January and February 2009.
“Not only has there been relative out performance, but there has been growth,” he adds. Advance Auto Parts saw a 3 percent increase in the fourth quarter, while O’Reilly Automotive and Monro Muffler Brake both saw 6 percent increases in the fourth quarter.
Compared to the S&P 500, the aftermarket is down just 0.7 percent year over year, while the S&P is down 40 percent. And year to date, the aftermarket is up almost 13 percent year to date, while the S&P is down 3 percent year to date.
“This is an area where investors want to be involved in because they see sustaining trends,” Cristello says, adding he thinks the out performance will continue, as he doesn’t think trends will change in other industries.
“The aftermarket right now is on the cusp of a period of time that we probably haven’t seen in many, many years,” he notes. “I think there are a lot of developing trends, and I almost would go as far as to say there’s a secular shift for your business.”
Overall, the current aftermarket situation is affected by a number of areas, including elevated gasoline prices, declining miles driven, contractions in consumer spending, a rising unemployment rate, spikes in charge-offs and delinquencies and depressed consumer sentiment.
“In my opinion, until the consumer gets healthy again, until the consumer is no longer concerned about job loss, no longer concerned about savings and having to take every dollar I make and preserve it because I don’t know what’s going to happen, the healthy economy…will still be subject a little bit,” Cristello says. “I don’t think this is going to be a hockey stick recovery and a lot will depend on the mindset of the consumer based on the changes they’ve made.”
Looking at gasoline prices, we’re now seeing 30 percent to 40 percent declines in year over year prices after seeing the same marks in increases last year. That’s important, because when the percentage of disposable income passes 3 percent, which it did last year, miles driven decreases. Now it is below that threshold. However, 19 of the last 34 months have seen declines in miles driven.
“But what’s important, and this is going to be something we certainly have to pay attention to, but February was the first month since November 2007 where miles driven increased,” Cristello says. “I think this certainly is an important step.”
Keeping the aftermarket on a positive course in investors’ eyes will be aided by the potential thousands of dealership closings Cristello anticipates later this year.
“You’re going to get a chance at it, but you have to be successful,” he cautions. But he says customer service is a key part of keeping those new customers in your bays through this changing time.
Add to that lower gas prices, anemic new vehicle sales, rising vehicle ages and recent strength in service and parts, and a good light is shed on the aftermarket. Also, despite a perceived collation between miles driven and unemployment, “miles driven actually bottomed while unemployment was still low. And miles driven started to tick up and turn positive before unemployment peaked,” he says.
Cristello says he’s positive on the opportunities ahead and so is Wall Street — they’re making money on the aftermarket and they’re investing in it.
