This is not exactly the year we were expecting

Jan. 1, 2020

3 min read

When 2007 began, we were optimistic that most of the issues that plagued the aftermarket in 2006 would have subsided and this year would yield solid results. Though we maintained a level of cautious optimism, we were confident that the stabilized gas prices (less "shock" factor at the pump) and easier year-over-year comparisons would create a much-needed boost to industry trends from a sales perspective. So as of press time, aside from a couple of months that created some enthusiasm, 2007 has been very much like 2006. What happened?

In our discussions with technicians, distributors and retailers, it appears the consumer once again was able to defer automotive services, and it's clear to us that this "deferral" mentality now might be somewhat ingrained.

But perhaps the bigger question is why demand hasn't been as robust as many might have been expecting so far this year after a particularly soft 2006.

Maybe a reason for the softer trends is related to miles driven data, as it appears vehicle owners are driving a bit less at the same time that vehicle registrations continue to climb. The net effect is that consumers are able to spread drivable miles over multiple vehicles, allowing for greater service deferrals.

It may be a stretch, but we do think there is some correlation, as Figure 1 illustrates a flattening in miles driven since 2005. And through June 2007, reported miles driven have declined four out of the six months. The only part about the decline in miles driven that we struggle with is the fact that year-to-date, miles driven are down by only 0.4 percent. On an average annual mileage of 12,000, that would equate to roughly 50 fewer miles, which certainly seems insufficient to result in such a tough operating environment.

So, if it's not entirely miles related, what other factors could be impeding a more robust recovery this year? Aside from the obvious consumer budgetary constraint, we think that an increased durability of parts has actually altered the service and maintenance requirements on today's vehicles.

Although we are writing this in early September, many may not read this until late October, at which point the macro environment might have deteriorated further. The consumer's budget has been strained for some time now, and without the ability to draw down on home equity lines and factoring in the peak of adjustable rate mortgage resets that are coming due in the next six months, it could get worse before it gets better. Many on Wall Street are beginning to discount a recession.

We still like the underlying fundamentals of the aftermarket and think the long-term growth trends (in line or better than GDP) are sustainable.

We believe deferred automotive services will, at some point, turn into sales. In the interim, if the industry as a whole can find ways to keep costs low, accelerating sales trends could provide a significant amount of operating leverage and — from an investment perspective — some very good buying opportunities at current prices.

BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, including the automotive aftermarket.