Until an indestructible car is invented, Cid Wilson, analyst and director of research at Kevin Dann & Partners, says the companies he covers will profit. Wilson tracks retailers, but his primary focus is the automotive aftermarket. Companies in this slice of the industry sell mechanical and auto body parts to consumers and repair shops. Some also handle auto repairs.
Figures from R.L. Polk show that American drivers are holding on to cars longer. The average age of vehicles in the U.S. in 2005 was 9.1 years old compared with 8.9 in 2004 and 8.6 in 2003. And with the number of vehicles on the road increasing each year, the probability of accidents as well as the number of cars in need of repair increases, says Wilson.
One challenge for auto aftermarket retailers is that auto dealerships are expanding their parts and service business to make up for shortfalls from sales. “GM loses $2,330 a car,” says Wilson, quoting statistics from the 2005 Harbour Report. “They are looking for other ways to make money, and the aftermarket side is very lucrative.” Wilson also explains that when automakers offer sales incentives-such as employee pricing to the public, it puts newer cars on the road that don’t need repairs right away, slowing sales for aftermarket retailers.
Wilson believes Keystone Automotive Industries Inc. (NASDAQ: KEYS) should benefit from more cars on America’s roads. Keystone sells collision repair
parts such as fenders, hoods, bumpers, paint, and other materials, for cars and light trucks, “You have a lot of regional players, but they are the only ones with a national footprint,” Wilson explains. Because of its larger distribution network, Keystone can get requested parts to customers faster than smaller competitors. About 97% of its business comes from auto body repair shops. Keystone, which doesn’t have any debt, has been acquiring smaller firms. “They are an increasingly dominant player,” says Wilson.O’Reilly Automotive Inc. (NASDAQ: ORLY), which sells products such as alternators, starters, fuel pumps, oil, antifreeze, and brake shoes and pads, also benefits from its large distribution network. Half of its customers are do-it-yourselfers while the rest are auto shops. The commercial business makes O’Reilly less dependent on foot traffic, Wilson says.
He’s also a fan of Advance Auto Parts Inc. (NYSE: AAP). Like O’Reilly, Advance sells auto parts and maintenance fluids. As the nation’s second largest auto parts retailer, it has a good deal of buying power since many manufacturers can’t afford to lose Advance’s business. And the upscale appearance of its stores gives the company a competitive edge. “Advance is to Autozone what Target is to Wal-Mart,” says Wilson. “Its stores are the best looking in the industry,” which helps it attract higher-income consumers who aren’t going to quibble over slightly higher prices.
Monro Muffler Brake Inc. (NASDAQ: MNRO) is also high on Wilson’s list. Monro offers a range of repair and maintenance services, such as oil changes; brake, muffler, and exhaust system repair; heating and cooling system; and transmission-related services. Wilson says Monro uses low-cost oil changes to attract additional business. The company checks for problems during oil changes and offers to fix them. Many of Monro’s competitors are small independents or franchisees. Its company-owned structure provides for better quality control, giving it a reputation for getting repairs right the first time as well as allowing it to charge a little more for services. “If it’s done right the first time,”says Wilson, “most people don’t mind paying 3% more.”
CID WILSON Stock Picks
|
Company Exchange: Symbol |
Price |
12-to 18-Month Price Target |
P/E on Projected 2006 Earnings |
Est. 5-Yr. Annual EPS Growth Rate |
Why Stock Will Outperform |
| Keystone Automotive Industries Inc.(NASDAQ: KEYS) | $38.15 | $48.00 | 20 | 25.0% | Large distribution network allows Keystone to get parts to customers faster than smaller players. |
| O’Reilly Automotive Inc. (NASDAQ: ORLY) | 32.51 | 47.00 | 19.9 | 20.0 | Half of the company’s business comes from auto repair shops, making it less dependent on foot traffic. |
| Advance Auto Parts Inc. (NYSE: AAP) | 43.01 | 53.00 | 17.4 | 17.0 | Size gives it buying power and upscale appearance attracts higher-income consumers who are willing to spend more. |
| Monro Muffler Brake Inc. (NASDAQ: MNRO) | 33.84 | 40.00 | 18.3 | 15.0 | Monro Muffler uses low-cost oil changes to attract business; company-owned structure provides quality control and better service. |