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Americans Are Keeping Their Cars Longer - Where To Invest In The Automotive Sector

|Includes:AZO, America's Car-Mart, Inc. (CRMT), GPC, GPI, ORLY, PAG, PBY, SAH
Consumers are not being drawn into a new car purchase so easily these days. The latest data from Polk Automotive confirms what we've seen on American roads for some time: the age of the cars and trucks we're driving has hit an all-time high. Here are the survey findings:
  • 2011: 10.8 years vs. 10.6 years in 2010
  • Average car in US 11.1 years old vs. 11.0 in 2010
  • Average truck in US is 10.4 years old vs. 10.1 in 2010
  • There are now 240.5 million vehicles in the US - up nearly 500,000 from 2010
These numbers should not come as a surprise. The average age of cars and trucks has been steadily rising over the last decade due a combination of factors. These factors include the higher prices on new cars, economic downturn with high unemployment and the mindset of the consumer. It may be two years or more before new car sales start to pickup.

From an investing perspective, this means that auto parts supply companies and used car sales will benefit from the older age of cars in the U.S. You have the do-it-yourself group that will purchase from the retail auto suppliers, auto repair shops that purchase from wholesale parts suppliers and the full service dealers who service existing cars with warranties, etc. The table below shows stocks from each of these sectors.

The best performing stocks in this sector is O'Reilly Automotive ORLY which is up 44% in the past year and AutoZone AZO, up 37% in the last year. Group 1 Automotive GPI was up 30% and Penske Automotive Group PAG was up 25%.

The only stock on the list with a poor performance was Pep Boys PBY that was down 17% in the past year. This selloff has created a nice valuation as PBY has a EV/EBITDA ratio of 4.8 which is the cheapest stock on the list. PBY has an estimated EPS growth of 22.7% in 2012. This EPS growth is not priced in to the stock so if PBY can deliver the stock will outperform this year. AAP has EV/EBITDA of 7.1, a lower valuation than AZO (9.7) and ORLY (11.1).

In the retail car sales, I prefer America's Carmart CRMT over Sonic Automotive SAH because they sell used cars while SAH also operates new car dealerships which I believe will lag behind used car sales in 2012. America's Car-Mart operates as an automotive retailer in the U.S. CRMT primarily sells older model used vehicles and provides financing for its customers. As of October 28, 2011, the company operated 111 dealerships in 9 states. CRMT has an EV/EBITDA of 8.7 which is slightly higher than SAH at 8.5.

I rate Genuine Parts GPC as a neutral holding as it has too much inventory suggesting the wholesale business may be lagging. GPC has a nice dividend yield of 2.9%. GPC saw a 15% increase in profit to $151.8 million for the third quarter of 2011. Meanwhile, total sales increased 11% to $3.29 billion due to improvements across all their businesses as well as favorable conditions in the aftermarket and company-specific sales initiatives. Both earnings and sales surpassed Consensus Estimates during the quarter. Despite an increase in selling, general and administrative expenses, the company's operating profit rose 18% to $276.8 million. Genuine Parts has undertaken various initiatives to boost sales and earnings, such as product line expansion, penetration into new markets and acquisitions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.