For the automotive replacement parts industry and parts retailers the road has been much less bumpy than most industries over the last couple of years. As consumers worried about having enough to spend on the bare essentials, purchasing a new car was the least of their priorities. The average age of vehicles on the road has continued to increase, as has the mileage driven. In addition, the automakers' troubles resulted in thousand of dealership closings that has sent many drivers in need of repairs to independent garages that the parts retailers service.
These favorable trends have helped the replacement parts sector become one of the best performing throughout the recession and in the slow recovery currently taking hold.
Is the trend your friend?
The recent continuation of these trends was confirmed last week by the country's largest aftermarket auto parts retailer, AutoZone (NYSE: AZO). Like its top competitors O'Reilly Auto Parts (Nasdaq: ORLY) and Advance Auto Parts (NYSE: AAP), AutoZone easily topped analyst estimates in its most recent quarter. In fact, the company's first quarter was the eighth consecutive quarter in which earnings per share grew by more than 20%, and the 17th straight quarter that saw a greater-than-10% increase in EPS.
However, for the first time in many months I began to hear some caution, or at least a taming of expectations on the company's conference call. I don't believe AutoZone executives believe that the sector's growth is going to slow substantially, but perhaps the perfect confluence of conditions that have supported this growth of late are beginning to subside.
Another factor that has benefited the aftermarket parts sector has been the weather. Extremes are bad for cars, and AutoZone and its competitors have all recently mentioned how these weather conditions have helped sales. However, when CEO Bill Rhodes was asked how great the effect of the weather has been on business, he explained, "You could think about it being maybe 20% or so of our growth in same store sales."
In addition, Rhodes made it a point to stress that AutoZone would not put targets or goals on its mix of commercial and retail sales. Due to the rash of dealership closings, the greater complexity of cars, and a new generation of drivers, working on the family car in the driveway is no longer an American pastime. This has shifted the greatest opportunities for growth to the commercial "do-it-for-me" space. AutoZone and Advance have been working toward building a mix more similar to O'Reilly's 50/50 revenue split.
AutoZone is the retail leader, but it gets only 12.4% of its revenue from its commercial business. While, I still believe the commercial business will continue to be the revenue growth engine of the industry, Rhodes may be positioning expectations for a temporary slowdown.
Automaker comeback?
Perhaps the biggest threat to growth in the near-term is the fact that Ford (NYSE: F) and a government-resuscitated General Motors (NYSE: GM) are once again making cars that consumers want to buy, and may actually be able to afford. The Fool's own John Rosevear has been bullish on Ford for a while now and has predicted a rebound in new car sales.
Strong new vehicle sales in October and November sent "SAAR" -- the seasonally adjusted annualized rate of vehicle sales -- over the important 12 million mark. Ford and Honda (NYSE: HMC) posted greater than 20% sales gains in November while General Motors and Chrysler lagged slightly behind, but both also posted double-digit sales gains for the month.
While the improvement is good to see, two months of strong sales numbers do not necessarily make a trend, and SAAR is still significantly lower than the 16 million mark that was the normal rate in the years leading up to the financial crisis.
Just a small headwind
An improving economy and a resurgent U.S. automotive industry have helped boost car sales from very low levels. While many investors remain extremely bullish on Ford and some its peers, I am not as optimistic the growth will continue. However, in the near term, it is a small headwind for the aftermarket parts and repair sector. I am still a bull on the auto parts names, but after the run these stocks have had, I don't recommend jumping in here.
It's "put up or shut up" time for AutoZone and its peers, as the confluence of favorable trends that have supported the industry become less of a tailwind over the next few quarters. Investors have baked much of the good news into these stocks, so any slip up would certainly be felt in their prices. For now, I think the best place to watch is the sidelines, but I guess we'll have to wait and see.
