Thursday, January 15, 2009

Thesis: Automotive Replacement and Accessories

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I've been looking at this automotive replacement (and accessories) business for a while as a "Pooring of America" theme. This could be both a cyclical (recession) and indeed potentially secular (if American's start increasing their savings rates and not flip cars every 3 years) play.

I have yet to pull the trigger but here are the charts of the main candidates on this thesis. I am quite familiar with these companies as I worked in a supplier who sold into these businesses early this decade. The top two have the better charts of the foursome...

Market leader, "best in breed", run by Eddie Lampert - Autozone (AZO) - middle of pack valuation similar to growth rate

O'Reilly Automotive (ORLY), digesting a market consolidating purchase of CSK Auto - potential to turn those stores around can give upside - stock valuation might already reflect this

Advance Auto Parts (AAP), similar valuation to AZO

Pep Boys (PBY) - run... run far away - only for gamblers

So despite playing off the same theme - they obviously have different execution, history, reputation, and charts. Of the four, AZO and ORLY have almost identical set ups - the conservative larger cap mutual fund will flock into Autozone as it's the sure thing. Someone with more risk taking aptitude and "growthy" aptitude will opt for O'Reilly since it has some potential to layer on EPS growth if it can convert the CSK stores to same level of performance as their own.
  • Comparable store sales for OReilly stores open at least one year increased 1.5% for both the third quarter and first nine months of 2008. Comparable store sales for CSK stores open at least one year decreased 4.3% for the portion of CSKs sales in the third quarter since the July 11, 2008, acquisition by OReilly. Consolidated comparable store sales for stores open at least one year decreased 0.8% for the third quarter of 2008 and increased 0.5% for the first nine months of 2008.
So if you can flip -4.3% to +1.5% you have a 5.8% "growth" - not bad.

Advanced Auto is an ok, if uninspiring play and for same valuation you can buy the leader (AZO) - frankly the chart is more of a short than a long (wish I had noticed the setup about 10 days ago). Pep Boys - good luck with that.

I've had my eye on O'Reilly and it has now pulled back to its 50 day moving average - it would be imperative for this name to hold that support and then bounce.

Here is a Wall Street Journal article from yesterday's paper on this thesis... basically it's the same theme as dollar stores, pawn shops, Walmart (WMT), McDonalds (MCD) et al. Remember, if things go the way I anticipate we're not talking a cyclical shift (recession vs no recession) but a secular shift (global forces, higher taxes, work insecurity over the long run leads to higher savings rates in U.S.) Specific to cars we pointed out in the blog in 2007 how desperate consumers were now reaching out to 6 year and 7 year loans... mini mortgages if you will. We've reached the end of our rope.

The Hot New Car Is Your Old Car
  • Until recently, many drivers treated their cars less like transportation and more like handbags, jewelry and other trendy accessories. Drivers craving the latest in mechanical "bling" found easy credit and inexpensive lease deals attractive enough to get a new ride every three years or so.
  • Today, the scarcity of attractive terms for financing and leasing means that many people are keeping the cars they have. As a result, car dealerships are quiet while service shops buzz.
  • "The three-year ownership mentality has crumbled," says Trevor Traina, founder of DriverSide, a Web site that helps people keep up with car maintenance and avoid overpaying for repairs. As new-car sales declined sharply, several sites like DriverSide and RepairPal have cropped up to cater to drivers who are keeping their old cars in shape instead of buying new ones.
  • The average trade-in age for cars has crept upward to 6.2 years in October, up from 5.8 years in October 2007, according to auto industry researcher J.D. Power & Associates. Keeping a car longer usually works for owners because cars last longer and are more reliable than ever.
  • For decades, Ashley Fletcher ditched his cars after they reached 50,000 miles. Now he plans to keep his 2004 Lexus RX 330 for two or three more years -- or until it reaches 70,000 miles. If all goes well, he might shoot for 100,000 miles. Like many drivers, Mr. Fletcher scaled back his automotive aspirations because of the economic downturn. "My portfolio lost about 40% last year, so I'm certainly in no mood to buy a new car," says the retired sales and marketing executive from Pinehurst, N.C. To that end, he's making a point of changing his oil and other fluids regularly and keeping his tires properly inflated to help them last longer.
  • The automotive aftermarket is taking advantage of the upkeep trend. Blue Magic, a maker of leather-care products and cleaners -- what are known in the industry as "appearance chemicals" -- just increased its line to eight products from three a year ago, says spokesman Jeff Schell.
  • While many in the industry predict a return of demand for new vehicles within a year, others detect a deeper shift in consumer attitudes. John Wolkonowicz, an analyst with IHS Global Insight in Lexington, Mass., acknowledges that U.S. drivers have a proclivity for big, new flashy vehicles. But that could change for good in a drawn-out recession. If the downturn lasts another year or two, he says, a "new frugality" could take hold that would include longer-term car ownership and disdain for pricey new models. (well that's getting over the top - Americans will still love the flashy new thing - but only so many will actually be able to put out for them)
  • ..... also difficult to get over one's desire for something new. Ms. Wellington admits that she'd prefer to drive a newer car, but a slump in the used-car market means she'd get little if she traded in the Saab. Overall, keeping it makes better financial sense. That doesn't keep her from dreaming about a new Audi A4, which she says is more stylish and has technological and comfort features that weren't available when her old car was built. (ah Ms. Wellington - if we only could all want what we wish for - my advice is just turn yourself into a bank holding company - or a state government - and all your wishes will come true - courtesy of the Nanny State)
No positions

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