Autoparts Vendors: Double Winners of Post-COVID Shift of Drivers’ Priorities and Microchip Shortages

June 18, 2021

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Autoparts Vendors: Double Winners of Post-COVID Shift of Drivers’ Priorities and Microchip Shortages

Recent U.S. stats that showed astounding 7+% annual inflation of used cars, coupled with apparently lingering shortage of essential microprocessor chips, a vital component of all modern cars, resulted in a dynamic exhaustion of new models’ inventories globally. Consequently, car owners – even those who never bought used cars before – will be forced to hold on to their cars and trucks for longer periods going forward. According to IHS Markit, the average age of a vehicle on U.S. roads rose by a month this year to a record 11.9 years. IHS said that it expects the shift will create opportunities for repair shops and auto parts sellers because older vehicles need more service. The agency expects significant upward pressure on average car age from 2021 on as consumers have been forming a new normal both economically and in how they use personal vehicles in a post-COVID-19 era. According to IHS Markit, “The average vehicle age has been inching toward 12 years for several years now, and the pandemic is likely to raise it by four to six months in the coming years … A decade ago, the average age was 10.6 years.

The cumulative market share of the top 10 auto part chains has increased from 44% in 2009 towards 60% presently. The above mentioned long-term trends, as well as price increases due to accelerating inflation will continue to grow their revenues and profits.

These shares can still be bought at favorable investment multiples: the most interesting stories are AutoZone (AZO) with a P/E of about 15X and O'Reilly Automotive (ORLY) with a P/E of around 20X.

AutoZone (AZO), as of May 8, 2021, had 5,975 stores in the US, 635 stores in Mexico and 47 stores in Brazil - a total of 6,657 stores.

AutoZone reported net sales of $3.7 billion for its third fiscal quarter ended May 8, 2021, an increase of 31.5% from Q3 of fiscal 2020. Domestic same store sales increased 29% QoQ. Operating profit increased 63.4% to $803.5 million over the same period. Net income for the quarter soared 74% over the same period last year to $596.2 million.

Share buybacks over the past decades have, and will continue to, play, an integral role in bolstering shareholder returns. Since 1998 when AutoZone first started share repurchases, over $24.65 billion has been spent on buybacks. Continued share buybacks have already been announced: in March 2021, the board authorized $1.5 billion in share buybacks, equating to approximately 5% of shares outstanding at a current market price. Importantly, share buybacks are properly funded, accounting for over 70% of total free cash flow, which, while significant, is normal for AutoZone.

Since late 2014, O’Reilly Automotive (ORLY) stock price has tripled and thus it has outperformed the S&P 500 by a wide margin (+388% vs. +134%). But since its IPO in 1993, O’Reilly has rallied more than 200-fold, from about $2.50 to $537 now. Over the past decade, the stock has rallied 800% and hence it has outperformed the S&P 500 by a wide margin, but, based on its current investment multiples, has a substantial further upside.

The company has grown its revenues and its earnings per share at an average annual rate of 8.3% and 24.5%, respectively. O’Reilly has maintained its strong business performance so far this year. In the first quarter, it grew its comparable sales 25% and its earnings per share 78%, from $3.97 to $7.06 with the latter exceeding the consensus by an impressive $1.75.

O'Reilly is one of the largest vendors of aftermarket automotive parts, tools and various accessories, serving both professional and street customers (41% and 59% of 2020 sales, respectively). The company sells branded as well as own-label products, with the latter category comprising nearly half of sales. O'Reilly had 5,616 stores as of the end of 2020, spread across 47 U.S. states and including 22 stores in Mexico.

In both cases, by the end of the year, one can expect at least 8-10% growth in these shares under the current market environment.