Are Automotive Part Retailers Recession-Proof? – Forbes

December 16, 2021 by No Comments


Without a doubt, 2021 has been an interesting year in the market’s history, from supply chain and inflation issues to increased volatility and the coronavirus. However, one industry—automotive parts—has thrived. These three stocks of interest—AutoZone, Genuine Parts and O’Reilly Automotive—dominate the industry’s market share, consistently gaining more from the small players thanks to the economies of scale they enjoy. Another major reason these stocks have had healthy returns lies with the state of the automotive industry. With new and used car prices increasing, consumers are keeping their vehicles on the road for much longer than before, creating an optimal environment for car part stocks.

According to the Auto Care Association, the U.S. automotive aftermarket was estimated to be a $297 billion industry in 2019 (latest available). The industry breakdown was $207 billion do-it-for-me (DIFM) customers, $58 billion do-it-yourself (DIY) customers and $32 billion tire sales. The industry is highly fragmented and driven by the following factors: the number and age of automotive vehicles in use; the number of miles driven per vehicle annually; the number of licensed drivers; the percentage of total light vehicle fleets represented by light duty vehicles, which generate higher average aftermarket product purchases versus purchases generated by cars; and the existence of $69 billion per year of unperformed and underperformed maintenance by U.S. vehicle owners, according to the Automotive Aftermarket Suppliers Association (AASA).

The coronavirus pandemic negatively impacted sales and perpetuated shortages, making 2021 a year for recovery across the industry. Sales volumes sharply recovered in China, Europe and the U.S. (which account for over 70% of global vehicle sales). While it is estimated U.S. light vehicle sales will rebound significantly, it is expected to fall below pre-pandemic levels. Sales would be stronger if not for the record low inventory levels and parts shortages that have plagued the market throughout 2021. In 2020, U.S. light vehicles posted a total of 14.45 million units, which is the weakest total seen since 2012. Semiconductor shortages as well as rising labor and raw materials costs are major concerns.

One major secular trend over the last several years has been the increasing popularity of light duty vehicles, a category encompassing pickup trucks, SUVs and crossovers. As previously mentioned, these vehicles generate higher average aftermarket product purchases versus passenger cars (such as sedans and compact vehicles), which have waned in popularity. Light duty vehicles accounted for 76.4% of total new vehicles sold in the U.S. in 2020, a percentage that was up from only 51.2% in 2010, according to the National Automobile Dealers Association.

On a positive note, rebounding gross domestic product (GDP), consumer stimulus, recovering unemployment and low interest rates should support sales volumes. Margins should benefit from record high price realizations and the significant cost cuts implemented in 2020.

Due to these factors, the automotive part retailers have benefited from strong repair and maintenance demand. The average U.S. vehicle age, easily one of the most important drivers, has reached a record high of 12.1 years, and trends are favoring the purchase of used vehicles versus new vehicles going forward. The reason this industry is sometimes denoted as “recession-proof” is because of the continuous strength with consumers that is unlikely to disappear regardless of market conditions.

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