Auto Parts Suppliers Headed Into The Perfect Storm With Amazon

| About: Advance Auto (AAP)

Summary

Amazon is taking aim at after-market auto parts suppliers, creating an attractive short opportunity.

Increasing import costs from Mexico and China will push do-it-yourselfers to look for cheaper parts on the internet.

The perfect storm of Amazon entering the auto parts industry and increasing import costs may drive already-punished shares of auto parts retailers even lower in the months ahead.

The after-market do-it-yourself auto parts business is a $50 billion dollar industry full of familiar names you pass on the road every day: AutoZone (NYSE:AZO), Advance Auto Parts (NYSE:AAP), and O'Reilly Automotive (NASDAQ:ORLY).

These neighborhood stores, however, are the latest industry to come under threat from an internet behemoth that chews up and spits out brick-and-motor retailers with alarming speed: Amazon (NASDAQ:AMZN).

While the idea of another set of retailers being cannibalized by Amazon will not surprise many investors, companies like AutoZone are now about to find themselves in the perfect storm. On the one hand, you have Amazon, which is taking aim at the do-it-yourself auto parts industry. On the other hand, you have the looming prospect of a 20% Trump tariff on products arriving from Mexico.

The combination of a Trump tariff and a larger presence by Amazon is a dangerous mix for firms like AutoZone. The tariff means that prices in these brick-and-motor stores for aftermarket parts could dramatically rise as one of the country's largest low-cost online retailer takes aim at the very same retailers. With consumers using Amazon to buy everything from paper towels to vintage dresses, it's not hard to imagine do-it-yourselfers logging on to score deals on parts rather than driving down the street.

Meanwhile, other independent auto parts firms are already feeling the pain that import restrictions can cause. On January 24th, the U.S. Department of Commerce issued a final ruling on import duties on truck and bus tires from China. The ruling states that countervailing duty rates would double to more than 50% from the DOC's preliminary level determined in August of 2016. The case is still under review, but if the International Trade commission upholds the DOC's determination when it rules on the case March 6th, the anti-dumping duties placed on tires from China would skyrocket. This kind of import duty would put a tremendous amount of pressure on retailers like Cooper Tire (NYSE:CTB) that import from China. Independent retailers like Cooper Tire are feeling pressure from internet retailers as well as firms like TireRack.com and Goodyear.com (NYSE:GT) that offer competitive pricing and door to door delivery.

It also seems likely that do-it-yourselfers may fix up existing cars rather than buying new cars now that gas prices are on the rise. While this trend may have benefited brick-and-mortar retailers like AutoZone and Cooper Tire in the past, it seems likely that price-sensitive consumers will turn to online retailers to get the best prices. Pricing pressure from online retailers like Amazon and TireRack will likely continue to put pressure on retailers even as more consumers fix up their own vehicles.

All of this pressure on after-market auto parts suppliers like AutoZone and Advanced Auto Parts creates a short opportunity for investors who believe that increased competition and increased tariffs will continue to put pressure on after-market parts suppliers in 2017.

It seems likely that the March ITC ruling will only make it more expensive for retailer Cooper Tires to import product from China while at the same time, Trump's proposed tariff, and anticipation about Trump's proposed tariff, drives the prices of retailers like AutoZone even lower.

Taking the upcoming ITC ruling into account, this short trade is a solid idea for both medium-term and longer-term risk-tolerant investors.

As Trump continues to espouse an unapologetic America-first stance, it's likely that companies that depend on low-priced imports to be competitive will feel the heat not only in the short term, but throughout the course of the new President's administration. At the same time, it's undeniable that lower-priced internet retailers like Amazon have taken their toll on their brick-and-motor counterparts.

While shares of AutoZone, Advanced Auto Parts and O'Reilly Automotive have already moved lower in 2017, the impact of rising import costs and increased competition from online retailers should continue to put pressure on the auto parts industry for the foreseeable future.

Disclosure: I am/we are short AZO, AAP, ORLY, CTB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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