What happened
Shares of AutoZone (AZO -2.96%), Advance Auto Parts (AAP -4.05%), O'Reilly Automotive (ORLY -5.62%), and LKQ (LKQ -0.83%), a collection of automotive parts and products retailers, all easily jumped more than 10% on Monday as COVID-19 cases increased around the world, but at a slower pace than in recent weeks.
So what
The idea that COVID-19 hot spots may be at a plateau, or close to it, was a welcome notion for many people watching much of the economy slow to a near standstill. Italy, France, and Spain all reported a deceleration in deaths from COVID-19. And New York State announced Monday its deaths were flat from the previous report, but also noted that even if this is the plateau, it's still a very high and stressful level for the healthcare system.
Expect the markets to remain volatile on both good and bad news surrounding COVID-19. The virus and its harm to the U.S. economy have clobbered many retail, transportation, and entertainment stocks, but the automotive aftermarket retailers have fared a bit better.
Generally, investors flock to auto retailers such as AutoZone, Advance, and O'Reilly when a recession is on the horizon. When consumers tighten their budgets, they opt to do more small maintenance and repairs themselves to save a few bucks. And during recessions, consumers often put off purchasing new vehicles, which increases the average age of vehicles on the road, creating more demand for repair parts.
But this is no traditional downturn, and as many consumers have taken social distancing to heart, and many Americans are working from home, miles driven have declined and the need for do-it-yourself repairs has also slowed, for the moment. LKQ, which sells parts to collision shops and mechanics, among other business segments, will also suffer with fewer discretionary miles driven and less collision-repair demand.
Image source: Getty Images.
With uncertainty on how quickly the economy will rebound once COVID-19 is under control, and how quickly consumers respond with purchasing, the important thing for companies is to bolster their cash positions and liquidity to survive the uncertainty.
One example is when Advance Auto announced in late March it would draw $500 million of its $1 billion credit facility to help fund ongoing operations and general purposes. It's also important for companies to improve their offerings to help offset lower foot traffic; AutoZone began offering free curbside pickup starting on March 24.
Now what
There's no question that COVID-19 will cause significant economic impact across the automotive industry, and the outbreak adds immense uncertainty in the near term. But for these auto retailers, as long as they can handle the near-term speed bump and improve their liquidity, the medium- and long-term business should be boosted with rising vehicle age and a bounce back in discretionary and work-related miles driven.
Take these large swings in stock price with a grain of salt as the broader markets will react to both good and bad news, often with no direct company news. These auto retailers should all be able to weather the storm, and investors would be wise to keep an eye on their long-term growth stories and balance sheets before making any buy or sell decisions.
