Passenger vehicles are living much longer today, over 10 years on average, and the rise in consumers maintaining their vehicles has benefited the automotive aftermarket, a sector BB&T Capital Markets Analyst Anthony F. Cristello says has strong fundamentals and years left in what he deems a multiyear cycle.
“If you look at Advance (AAP) and AutoZone (AZO) and O’Reilly (ORLY), the big three parts retailers, their stocks were up over 50% in 2010, which followed a year of outperformance from 2009,” Cristello said. “We think the companies are probably healthier than they’ve ever been. It’s just a question of when this wave or cyclical benefit begins to fade, what happens?”
Cristello predicts increased price competition and industry consolidation when the tailwinds do begin to fade but for now, he’s sees upside. In addition to “buy” ratings on the big three in auto parts retailers, Cristello is positive on suppliers with diversified business models.
“We follow a company called Federal-Mogul (FDML), which we have a ‘neutral’ rating on it right now, but that story could benefit because they do have some OE exposure, along with the stability of its aftermarket segment. When new vehicle sales start to accelerate, it will help the OE segment,” he said. “Installers, such as Monro Muffler (MNRO), over the longer term will continue to do well. . . . The company basically services vehicles and doesn’t rely on the do-it-yourself market.”
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