Auto-Part Sellers Should Rebound as Pandemic Eases
Their formidable defenses against downturns and short-term pullbacks in miles driven are intact.
Americans’ gradual release from COVID-19-related immurement has led auto-part retailers’ sales to stem what had been double-digit comparable slides at the pandemic’s spring peak, allowing their long-term strengths to re-emerge. While plummeting miles driven has pressured sales, we do not expect the strain to last and think the industry is better positioned than most brick-and-mortar retail sectors for the long term. The current situation should favor sales to customers repairing their own vehicles (do it yourself) rather than the professional (do it for me) sector, as motorists rein in costs and garages grapple with social distancing and localized second-wave restrictions, but we expect the reverse will hold long term due to rising vehicle complexity and the time demands on consumers.
AutoZone (AZO), Genuine Parts (GPC), and O’Reilly Automotive (ORLY) all trade above our fair value estimates, while Advance Auto Parts (AAP) is a more attractive opportunity, trading at a discount. With a long turnaround paying off but injecting more volatility into the present unsettled environment, we see Advance Auto Parts increasing operating margins to the low double digits over the next five years (from 8% in 2019), with near- and long-term benefits from its DIY-related optimization efforts, including a partnership with Walmart, a revamped loyalty program, and its late-2019 purchase of DieHard.
Zain Akbari does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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