In the current market environment, the aftermarket auto parts industry is not only a relatively safe sector to deploy capital, it also should continue to see increased growth. Andrew Bond explains why -- and gives one stock he favors in the industry -- in this Fool TV video. (A summary of Bond's analysis can be read below the video.)
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Why is the aftermarket auto parts industry so attractive? For three main reasons:
1. The age of vehicles driven: The average age of vehicles has increased to 10.6 years in 2008 from 9.1 years in 1999. This is favorable because as cars get older they require more work and repairs. Older cars are also more likely to be without any dealer warranty, so replacement parts are most likely to come from aftermarket retailers.
2. The number of miles driven per vehicle lifetime: 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, and it also makes buying a used vehicle more favorable as well.
3. The number of dealership bays and non-dealer repair shops: As thousands of dealerships closed across the country over the last few years, thousands of repair bays went away. This will continue to bring more customers to independent repair shops that are serviced by the aftermarket parts retailers.
The best play
O'Reilly Auto Parts (Nasdaq: ORLY) is one of the largest retailers and distributors of aftermarket and specialty auto parts in the United States. I believe O'Reilly will be the best performer of the group because of its 50/50 revenue mix between commercial and retail sales. Customers in the DIY (do-it-yourself) segment purchase parts at one of O'Reilly's more than 3,000 stores, and repair their vehicle themselves. Revenue generated revenue from the do-it-for-me market (DIFM) is from commercial repair shops who fix customers vehicles. These parts are generally delivered to the repair shop by O'Reilly and its competitors. O'Reilly's top rivals Advance Auto Parts (NYSE: AAP) and AutoZone (NYSE: AZO) generate much less of their revenue from commercial sales, close to 30% and 11%, respectively.
O'Reilly's outperformance metrics
1. Dealership closings: In 2009 alone more than 1,500 car dealerships closed. The repair work that was done at these dealerships will shift to independent garages that are serviced by parts retailers. O'Reilly stands to benefit the most as it represents a huge share of the DIFM (commercial) market.
2. Close to $50 billion in deferred service: As the economy suffered, Americans held off on getting their vehicles repaired, as discretionary spending was put on the backburner. However, as the economy improves, this deferred service will begin to be translated to revenue for the retailers. Again, O'Reilly should benefit because of its leading DIFM business position.
Since the beginning of 2008, the S&P has declined by about 25% while as a group these stocks are higher by an average of 54%. The metrics point to continued outperformance in an improving economic environment, as well as in the stagnant economy that we face today.
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