Currently trading around 33 times earnings, Monro Muffler Brake (MNRO) is valued at a premium to both the S&P and its own 5 year P/E average of around 24. Bulls may be correct that the business is a good one. MNRO's recent 10K capably makes the case:
According to industry reports, demand for automotive repair services, including undercar repair and tire services, has increased due to the general increase in the number of vehicles registered, the increase in the average age of vehicles and the increased complexity of vehicles, which makes it more difficult for a vehicle owner to perform do-it-yourself repairs.
At the same time as demand for automotive repair services has grown, the number of general repair outlets has decreased, principally because fewer gas stations now perform repairs, and because there are fewer new car dealers as a result of dealership closures by car manufacturers such as Chrysler and General Motors. We believe that these factors present opportunities for increased sales by the Company, even though the number of specialized repair outlets (such as those operated by Monro and our direct competitors) has increased to meet growing demand.
Further, the industry will continue to consolidate. Two causes were discussed on the most recent earnings call. MNRO may be one of the few service businesses to benefit from the Affordable Care Act in the short-term, as small business owners feel pressure to sell their repair shops to serial acquers like MNRO. Longer term, MNRO CEO John van Heel pointed out that many smaller shop owners are "getting older" and that trend should benefit MNRO.
The 10K paints a picture of a very nice business. Unlike many competitors, MNRO operates, rather than franchises, its stores, allowing for greater brand cohesion. Because they generally do not extend credit to customers, stores generate almost no receivables and new store's actual net working capital is nominal. Company stores serviced approximately 4.7 million vehicles in fiscal 2013.
Ever since the Great Recession consumers have been putting off buying new cars in favor of getting their old cars repaired. Of course, as cars get older they naturally need more repairs and more expensive repairs in order to stay on the road. Yet as the recent strength in General Motors (GM) and Ford (F) attest, this situation is beginning to abate and car companies are once again selling vehicles in large numbers. These new vehicles are going to start pushing the older vehicles off the road over the next year or so as new car buyers trade-in their existing used cars, and owners of older used cars then trade up to newer used cars.
I want to point out a related threat. The problem isn't just a bump in new cars over the next couple years depressing the need for repairs. MNRO might also be looking at a change in consumer behavior regarding leasing. Repair shops may see a decline in business if more consumers decide to lease rather than own.
There is evidence we may be seeing the start of a trend towards more leasing and less buying. As detailed in this Fortune article, leasing is "back with a vengeance" and nearing all time highs. Last year leasing reached 22%. This year, it could break through 25%. The problem isn't just that people who lease have lower maintenance costs. Leasing also puts consumers into contact with dealerships more often, and those dealerships provide services consumers would otherwise receive from companies like MNRO.
Although MNRO was able to show revenue growth in fiscal 2013, the driver was acquisitions. Comparable store sales fell 7.3%. As the latest 10K admits "Monro has experienced significant growth in recent years due to acquisitions and, to a lesser extent, the opening of new stores." Should the market reward MNRO with such a high multiple if they aren't seeing meaningful organic growth anymore?
On the last earnings call, CEO Van Heel stated that "results are weaker than we had hoped" and "we have proven our inability to predict the sales side." With 11 insider sales and only one small purchase over the last 6 months, it doesn't seem like insiders have a high degree of certainty about future revenue growth. I believe many market participants would do well to sell their stakes in MNRO until the market lowers its multiple due to the twin risks of new cars and leased cars.