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In July I told fellow Fools about a favorite sector to play in the volatile market that we are still encountering today. The automotive aftermarket parts retailers were on a tear this summer, outperforming most equities and performing well as a relatively safe place to store capital.
The group remains hot, as Advance Auto Parts (NYSE: AAP ) and AutoZone (NYSE: AZO ) both made fresh 52-week highs recently. My top pick in the sector, O'Reilly Auto Parts (Nasdaq: ORLY ) , is at its highest level since June, as it continues to integrate its recent $1 billion acquisition of CSK Auto Parts.
While the parts retailing sector remains strong, investors would also be wise to look at the automotive parts manufacturers as a way to play the strong growth. Tenneco (NYSE: TEN ) and Borg Warner (NYSE: BWA ) have also recently seen 52-week highs. These manufacturers have exposure to both the aftermarket business as well as the OEM business, selling directly to automakers such as Ford (NYSE: F ) and Toyota (NYSE: TM ) . However, my favorite stock in this group is Dorman Products (Nasdaq: DOR ) , which sees most of its revenue from the aftermarket business. Let's look at some of the industry trends to see why this should benefit the company.
Vehicle age: Domestically, cars are not getting younger. The average age of vehicles has increased to 10.6 years in 2008, from 9.1 years in 1999. Older cars are more susceptible to breaking down and require much greater routine maintenance. These cars are also more likely to be without any dealer warranty, so replacements are more likely to come from aftermarket parts and installed by garage shop customers of the parts retailers instead of the car dealerships.
Miles driven: Similar to the metric explained above, more miles are being driven during a car's lifetime. This is because cars are manufactured at a much higher quality than in the past. This defers the purchase of new vehicles, which makes buying a used vehicle more favorable as well. These used vehicles are more likely to receive maintenance and aftermarket parts from independent garages.
To be honest, Dorman makes some pretty weird parts. In fact, if you asked most car drivers what a power steering pulley or a window regulator was, I'd bet you would not get the correct answer. But these parts are essential in automobiles today, and if you are looking for one of these obscure parts, Dorman might be the only game in town.
Dorman specializes in making obscure parts that, when they were first available, could only be bought from the car dealership. However, once Dorman is able to produce a similar aftermarket part, it is able to sell it to aftermarket retailers at aftermarket prices. Close to 70% of Dorman's sales fall into this category. This is important, because in many of these product lines the company has created a sort of small monopoly, as no other aftermarket suppliers can manufacture these obscure parts as rapidly and as efficiently as Dorman.
Auto parts retailers stock somewhere between 15,000 to 21,000 SKUs in each of their stores in order to meet demand for the many different makes and models of cars on the road today. Dorman also creates parts that fit multiple vehicle models, which makes their parts more desirable for retail stores in which shelf space is at a premium. Dorman's ability to efficiently create and distribute parts that other competitors cannot gives them a competitive advantage in this growing industry.
If you are looking to invest in this industry and can't get over the negative stigma associated with all things retail, look no further than Dorman Products.