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In early August, I discussed several potential beneficiaries of a lingering slow economy, including dollar stores, pawn lenders and off-price retailers. Today, I want to extend the analysis to a similar theme: used cars.
New car sales have been weak now for a few years and are gradually recovering, but this weak economy suggests we'll continue to see cars aging and owners hanging onto their cars longer than they did prior to the Great Recession. Over the past decade, annual sales had been consistently in the 17-18mm units a year before plunging to 9mm and recovering now to approximately 13mm according to government data. Tighter credit and high unemployment are, to my mind, the primary challenges to new car sales.
An obvious beneficiary of such a trend would be used car dealers, but there are several other ways to take advantage of depressed new car sales, including parts retailers and manufacturers. Less obviously, one could consider companies that enable car parts to be recycled - perhaps very interesting due to those companies' limited competition. Here is a list of companies that I believe might benefit from the trend of drivers hanging onto their cars:
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As always, remember that these stocks shouldn't be taken as recommendations. I have included companies with market capitalization in excess of $500mm, but the list may not be complete. Plus you should always do your own research before investing.
The group has a median price change in 2011 similar to the overall market: a decline of 1%. A couple of these stocks are up roughly 20% and a couple down more than 15%. The group has a median P/E ratio of 14.6, which makes the typical stock a bit more expensive than the S&P 500's average overall. As the last two columns suggest, growth expectations for this group are relatively high, with the typical stock expected to grow earnings 22% this year and 14% next year. (This is based upon expected earnings as reported by Thomson Reuters.)
CarMax (KMX) is the country’s largest company focused exclusively on used car sales, though there are some publicly-traded chains that have some exposure to this sub-sector. The stock is down pretty sharply in 2011 and now trades at a substantial discount to the average P/E over the past five years.
Advanced Auto Parts (AAP), AutoZone (AZO), O’Reilly (ORLY) and Pep Boys (PBY) are retailers catering to do-it-yourself customers, but they supply small repair shops as well. In my opinion, ORLY is the most appealing of the group, but it is also the most expensive in terms of P/E. Alternately, it might make sense to look at Dorman Products (DORM), which manufactures private-label parts sold primarily through these chains. The company is the only one on the list with more cash than debt ($1 per share roughly) and has good insider ownership.
Monro Muffler Brake (MNRO) is the only service company to make the list. Not too hard to imagine how this stock might benefit from a trend to keep your car longer; drivers still have to keep their car tuned up and safe.
Copart (CPRT) and Kar Auction (KAR) both enable insurance companies to dispose of cars that have been totaled. I don’t know KAR very well, but I have followed CPRT for several years and find it to be a solidly-run company. One of their key customers is LKQ (LKQX), which buys the cars and strips them for parts. The company recently announced what appears to be a smart acquisition in the UK, which boosted the stock sharply, but so far the stock continues to look reasonably valued to me.
Hopefully I have given you another idea to consider if you believe the economy is likely to remain weak. Tighter credit and high unemployment are likely to depress new car sales and drive higher spending on auto parts and maintenance. Before investing, you should do your own investigation to identify risks and potential opportunities involved.
Disclosure: Alan Brochstein is currently holding no positions in the securities mentioned in this post.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Alan Brochstein maintains a business relationship with TradeKing.