Some experts think the U.S. economy is beginning to show signs of recovery. Possibly, but with so many folks still unemployed and access to credit at its lowest levels in years, consumers and businesses alike are tightening their purse strings. Over the past year, we’ve highlighted frugalpalooza opportunities for investors looking to profit from the widespread development of penny-wise consumers. Today we offer an interesting auto-related play.
One consequence of recession is that drivers often hang on to their cars longer. To keep an older vehicle in good working order, you need to spend money on maintenance and spare parts. Those factors make Monro Muffler Brake (NASDAQ:MNRO) a compelling play on the thrifty consumer. New York-based Monro offers an array of mundane auto services from oil changes to brake repair. They’re a sizeable company with 710 stores in 17 states.
With a market cap of just under $617 million, Monro qualifies as a small cap stock. However, many on Wall Street view it as a mid cap play. Either way, investors should note that small caps historically outperform larger stocks coming out of a recession, and Monro’s 2009 performance has a growth-stock feel. Monro shares have outpaced the S&P 500 in recent months – all the more impressive when considering that the Cash For Clunkers program was going on during that same time period.
Even so, Monro does not seem overvalued by most standards. Trading at just 17 times forward earnings, one could argue Monro is a value stock with growth stock traits. That P/E ratio is roughly in line with the broader market, but it also puts Monro at a discount to its peers. The company reported a 30% jump in fiscal second-quarter profits even as sales slumped a bit. This indicates the management team knows how to control costs. Over the past year, sales have grown nearly 9% and earnings per share more than 23%.
Want more reasons to like Monro Muffler Brake? The aftermarket for cars and trucks is a significant business opportunity for Monro at $240 billion in the U.S. and $370 billion globally. Furthermore, with some 3,000 auto dealers expected to close in the U.S. by the end of next year, more drivers will need places like Monro to work on their cars.
The bottom line is that slack auto sales and lower consumer spending isn’t always a bad thing. Some niches can outperform even when the consumer is struggling. Monro Muffler Brake is in just such a niche. To go with a solid stock for the value-minded driver, buy MNRO.
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Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.