http://www.Gabelli.com
Invest with Us 1-800-GABELLI (800-422-3554)
Hello All, My name is Carolina Jolly and I am the automotive aftermarket analyst here at Gabelli Funds. Today I want to review some factors that are driving aftermarket performance. I will focus on the distributors given that these stocks continued to generate positive comps in the 2007-2009 RECESSION even while the unemployment RATE hit a high of 10% in 2009.
On average, Autozone, Advance Auto Parts and O’reilly were down 38% the week of March 23, but have sincee rebounded to down 25%.
The stocks’ decline was due to the fact that miles driven, a key aftermarket factor, will inevitably fall in response to COVID-19 shelter in place orders. While we cannot quantify the exact effect on miles driven we do know that 1) according to OPIS gasoline sales fell 45-50% the first week of April, 2) Monro, a large operator of automotive repair shops announced negative comps of 45% for the last two weeks of March, and 3) Advance Auto Parts announced comps down 28% as of the two weeks ending April 4th. Given that there are currently 42 states with shelter-in-place mandates vs 9 states for the week of March 23rd, we believe that these numbers most likely continue to decline through April.
However, even with miles driven down significantly, we believe that once we are allowed back on the road there will be no significant changes to the underlying aftermarket drivers such as 3.2 trillion annual miles driven and growth in the underlying car parc. Even more, lower gas prices now down 98 cents to $1.85, could be a small catalyst as well as the fact that driving may be the near-term preferred mode of transportation relative to flying, cruises, and trains. There should be no change to the growth in the aftermarket sweet spot, or those vehicles 6-11 years old, which is expected to grow from 71 million in 2019 to nearly 90 million by 2022 or over 20% growth.
Within the aftermarket, we are interested in the distributors as these companies are considered essential businesses that have low capex, high margins and additional liquidity. For example. In 2019 AutoZone’s capex spending was 4% of revenue and the company generated a 22% EBITDA margin. Further, specifically, in our COVID bear, base, and bull cases ORLY and AZO do not trip either of their debt covenants and if the stores require shutdowns, both could pull from nearly $2 billion in revolver credit to maintain the business for an additional year.
We hope this helps explain our continued interest in the aftermarket and we hope you are staying safe, healthy and happy.
