A dark horse in a down economy. Cautiously optimistic. Sporting green shoots. Many characterizations can encompass how people see the automotive aftermarket, but in one area in particular — the industry’s investment environment — the depictions fall into agreement. Banking establishments, consulting firms and even the investors themselves concur, the aftermarket is and will remain a stable investment venture.
In this issue, Aftermarket Business presents its first-ever Investor Report, a series of articles that will delve into a historical analysis, present-day market conditions and the anticipated future of investments in the industry. The overall resounding theme from our aftermarket, banking and investor sources? Despite a faltering economy at large and the struggling OEM sector, the aftermarket remains resilient and stable.
“With 6 percent growth, there are not many industries where you can find that, especially not one with the size of the aftermarket,” an estimated $220 billion industry, says Dan Smith, president of Capstone Financial Group, an investment firm that handles interests in the aftermarket. For the past decade, investors have been looking at a myriad of ways to put money into the aftermarket, he says.
To illustrate the aftermarket’s stability, one need only look to the Standard & Poor’s (S&P) 500, says Graham Payne, Capstone’s managing director. “The S&P 500 is used a lot in the investment community as a baseline of how the general investments are doing. The S&P 500 is up a little over 9 percent. If you look at some of the companies in the automotive aftermarket, they’re up 76 percent,” he says.
Strong and profitable company performances have yet to reel in major public involvement from average investors, but they have caught the attention of private investors — those with a bit more room to take risks, says Stephen Spivey, senior industry analyst in the Automotive & Transportation group with Frost & Sullivan, a business research and consulting firm.
“We get the impression that the aftermarket is not really attractive to the lay investor. I don’t think the average Joe — the person who is picking stocks for his or her own personal portfolio — is going to buy stock from any big aftermarket company because the aftermarket does have a lot of challenges. The people really drawn to investments in the aftermarket are high rollers, risk takers, people who can take new ideas, take a company that is challenged, turn it around and profit from it,” he says.
Breaking down the dollars
Among the three basic aftermarket segments — manufacturers, distributors and retailers — the latter appear to be performing the best, as manufacturers struggle with smaller margins and distributors battle new methods in reaching the customer.
“Distributors are having a hard time. One, because of the Internet, meaning that a lot of manufacturers have jumped right over distributors to get to jobbers, directly to consumers, rather than selling products through distribution,” Smith says.
“For retailers, even though their sales have been down in some areas, stock prices have held fairly steady.”
The continued growth of the do-it-yourself market has been one factor pushing retail segment success, analysts say.
Finding steady footing
A picture-perfect investment environment is not reality in the aftermarket, but overall the industry has maintained stability for the past two decades, says Jeremy Thompson, managing director with ONCAP, a Toronto-based private equity firm with aftermarket investments.
Annual U.S. car sales over the past 20 years have peaked at around 17 million and been considered low at 13 million, he says. The recession brought sales to an average of roughly 10 million annually — and the large decline could be considered volatile from an investment perspective.
But, Thompson says, “looking conversely at the aftermarket over a period of 20 years, it’s incredibly stable. North Americans love to drive their cars, and they have increased the number of cars per household.”
Expanding on Thompson’s perspective, Brian Sponheimer, an analyst with investment firm Gabelli & Company, Inc., says industry investments have actually benefited as new car sales have declined.
“One thing is certain. People need to drive cars, and if they aren’t buying new cars they need to keep the vehicles they have on the road. Therefore, the aftermarket has benefited to a degree as consumers have deferred new vehicle purchases on account of uncertainty about their job, the housing market and the availability of disposable income — large factors in the purchase of a large, durable item like a car,” he says.
“The consumer then must choose to keep that car running to get him or her from point A to point B. It’s a major reason why aftermarket retailer revenues have risen despite overall economic weakness.”
The recent closings of thousands of dealerships have also offered new opportunities for both the independent repair segment — a chance to boost margins and their customer base — and other, stronger dealers, who can capitalize on fewer competitors, Sponheimer continues.
“The ‘washing out’ of poorly capitalized dealers can enable well-capitalized dealers to gain market share both passively, by attrition, and actively, by acquiring distressed dealers at attractive prices,” he adds.
Evaluating the market globally and recognizing areas for growth may also lead to expanded opportunities.
“Specifically in China there really isn’t an identifiable aftermarket because the auto industry is still in its infancy,” Sponheimer says. “Obviously the Chinese have driven cars for decades; however, we’re looking at the growth of the Chinese middle class. As that middle class matures, new car purchases will rise. Those cars will need to be serviced, either by the consumer or through service shops. This is an exciting dynamic, and we’re looking for ways to find actionable ideas to take advantage of that dynamic.”
Letting the outside in
Industry investment insights remain primarily positive; however, the aftermarket has not been immune to the impacts of external factors.
“Credit is a big thing. Asset-based loans are still fine, but cash flow loans just do not exist — cash flow loans meaning loans made to a company based on some multiple of its cash flow,” Smith says. “A lot of the banks have just cut out lending to aftermarket companies.”
Another weight on the aftermarket’s shoulders is a recurring perception problem by the investment community.
“The state of the OEM market does affect investment decisions in the aftermarket, as the aftermarket is often painted with the same broad automotive brush,” says Thompson. “So when the automotive sector is out of favor from the perspective of a lender or a credit officer due to some manufacturer troubles, the aftermarket is often lumped into this sector.”
But for the near future, some are cautiously anticipating a perception change — one that will breathe new life into the aftermarket’s investment environment.
“I think we’re in the midst of a rather dynamic shift here,” Payne says. “We are going from an industry where you kind of had expectations and everyone was doing fairly well, and then we had this dramatic fallout for the past 18 months.”
“And now everyone’s getting energized and appears ready for another decent economic run. But it requires much more strategy, planning, more knowledge, because the world has just changed dramatically.” ◽