Analysis: Sputtering economy puts auto repair firms in fast lane

By Fareha Khan

BANGALORE (BestGrowthStock) – With some 250 million vehicles on America’s roads, and an average age of nearly 10 years, times are good for the auto aftermarket repair chains.

Companies such as New York-based Monro Muffler Brake Inc (MNRO.O: ), Midas Inc (MDS.N: ) and Pep Boys – Manny, Moe & Jack (PBY.N: ) have had a good recession as drivers patch and fix rather than buy new, and that trend should continue for a few years yet as a shaky economic recovery deters big-ticket buys.

As consumers put off buying new cars, they create more repair and maintenance work for automotive repair companies.

Monro Muffler Brake enjoyed 7.2 percent same-store sales growth in the year to end-March, its best in 13 years.

Consumer spending picked up a touch — about 0.4 percent — in October, but is far from robust. Concerns about low inflation and slow growth have seen the Federal Reserve pump more money into the economy by buying government debt.

Industry trends should remain favorable for repair and service firms for another 2-5 years, BB&T Capital Markets analyst Anthony Cristello said.

For the moment, customers seem willing to have their cars fixed, the nation’s fleet is getting older, cars are more complex and credit is available.

New car sales are in a ditch, though improving slowly, and there is stubbornly high unemployment. Shuttered car dealerships are pushing more business to repair stores.

Midas and Monro Muffler currently trade at around 20 times next year’s predicted earnings.

The risks to this scenario are that new car sales will jump as dealers offer aggressive and sustained competitive pricing, and oil prices rise sharply, pushing up gas and tire prices, depressing the number of miles driven.

Last year, just 10.4 million new cars were sold in the United States, the lowest in 27 years. For 2010, automotive forecaster J.D. Power and Associates expects 11.5 million cars and light trucks to be sold in the United States.

Aging FLEET

The availability of credit, vehicle financing and an increase in leasing are factors driving new car sales, said Jeff Schuster, Executive Director of Global Forecasting at J.D. Power and Associates, an automotive forecasting firm.

While depressed new car sales and dealership closures have helped accelerate growth at Monro Muffler and O’Reilly Automotive (ORLY.O: ), long-run drivers continue to be new store growth, miles driven and the rise in vehicles’ average age, said Paul Lambert of Wasatch Advisors Inc.

Cristello sees continued demand for vehicle repair in the independent aftermarket, and doesn’t think rising car sales will have that big an impact.

He predicts the number of vehicles on the road that are less than 5 years old will keep declining until 2013.

“I like these stocks (MNRO, PBY, MDS) because I think the cycle they are participating in today is multi-year and will give them above average growth rates relative to the market,” BB&T’s Cristello said.

Stifel Nicolaus & Co analyst David Schick noted the industry has been driven by two years of weak consumer spending, but a current pick-up in new car sales and a more robust recovery could flip the dynamics.

AutoZone Inc (AZO.N: ), the largest U.S. auto parts retail chain, and O’Reilly are other players in an industry that is reporting healthy results.

Vehicle servicing, a highly fragmented $145 billion industry, according to Cristello, will see its fair share of M&A activity as companies look to drive growth and scale.

Monro Muffler, Pep Boys and Midas have little more than 2 percent of the market combined.

In the latest quarter, Monro Muffler added 7 retail tire and auto repair stores via two acquisitions totaling $7.1 million. In October, Monro Muffler said it planned to buy a company with annual sales of $10-$15 million by the year-end.

(Reporting by Fareha Khan in BANGALORE; Additional reporting by A.Ananthalakshmi, Editing by Ian Geoghegan)

Analysis: Sputtering economy puts auto repair firms in fast lane