The Economic Outlook For Auto Parts Retailers Looks Good

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Includes: AAP, AZO, ORLY
by: Strubel Investment Management
Summary

The average age of the nation's light vehicle fleet keeps rising.

Miles driven still remains strong.

Weather and gas price trends shouldn't hurt demand.

Over the past year the three major pure play replacement auto parts retailers – Advance Auto Parts (AAP), AutoZone (AZO), and O’Reilly (ORLY) have largely recovered from their 2017 swoon.

Does the future still look good for these companies or should investors expect another wipeout? Demand for replacement auto parts is generally driven by two major factors and two lesser but still important factors – the age of vehicles on the road, miles driven, weather, and gas prices. So, let’s take a look at each factor.

Age of Vehicle Fleet

Arguably, the number one thing that determines demand for replacement parts is vehicle age. Even if a vehicle is not being driven, things can wear out or degrade and break down. On this front, there is good news for investors. The average age of light vehicles on the road is at an all-time high of 12.1 years. Even with new car sales ramping up after the great recession, the average age of light vehicles on the road still increased by two years over the past decade. Perhaps even more good news is that new car sales seem to have plateaued recently. Over this past quarter, we’ve seen very strong consumer spending reads from several major retailers, so it wouldn’t be surprising to see new car sales begin to pick up in the future. In any case, we’d likely need a huge boom in new vehicle sales to start to bring down the average age of the nation’s light vehicle.

Miles Driven

Total number of miles driven is probably the second most important factor in replacement auto part sales. Here again we see good news.

The rolling-twelve-month total of miles driven has recovered from its great recession era drop and seems to be holding steady despite moderately rising gas prices. However, the huge increases seen from the 1970s through 1990s are likely over since we surmise that a big part of that decades-long trend has been the increasing number of women joining the workforce.

Weather

The third thing that affects demand for replacement auto parts is weather, especially snow. Back around 2017 two consecutive mild winters reduced demand for auto parts and led to significant drop in the stock price of three major pure-play auto parts retailers (fears that the sales drop was Amazon (NASDAQ:AMZN) taking share also contributed). With “global warming” it’s natural to wonder if there might be less snow going forward and thus milder winters which would reduce demand.

We do not think climate change will have much of an impact. While frequently referred to as “global warming” the much more accurate term is probably “climate change”. Without getting into specifics, the consensus seems to be that winters may not get milder in aggregate, but instead there will be less snow and more rain at the beginning and ending of each winter season with snow events becoming more extreme in the middle of winter. It remains to be seen how this will affect long-term snow fall totals. Even if snowfall totals drop, it could be offset by the weather outside of the snow belt becoming more extreme. Extreme heat can also cause automotive parts to wear out faster.

No matter what ultimately transpires with the climate, it doesn’t look like it will have a large enough effect on sales to be worth worrying about. As weather becomes more extreme, investors may want to prepare themselves for lumpy sales results as we saw in 2017.

Gas Prices

Gas prices are the final thing that affects demand for replacement auto parts. Part of the effect of gas prices is usually seen in annual miles driven as higher gas prices mean people cut back on driving. The other part usually manifests itself as consumers simply having less room in their transportation budget for repairing their vehicle and may put off non-critical repairs.

The outlook for gas prices looks moderate. While prices are off their 2016 lows they still aren’t near their 2013-2014 or pre-recession era highs.

There appears to be a bit of room for gas prices to rise before it starts having a serious effect on auto parts retailers.

Summary

The average age of vehicles continues to climb, miles driven is holding steady, and gas prices while higher are not in the danger zone yet. With many other retailers posting stellar results this quarter, the US consumer looks to be doing well. Right now the macroeconomic outlook for the big three replacement auto parts retailers looks great. Sure, there are some wild cards in Amazon’s push into the auto part sector and the specter of tariffs raising prices on some parts but nothing very troubling.

Disclosure: I am/we are long ORLY, AAP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.