Nomura Securities on Auto Parts Retailers: SAAR More of a P/E Overhang than EPS One; OKV Numbers Still Look Strong
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Rating Summary:
9 Buy, 30 Hold, 5 Sell
Rating Trend:
Up
Today's Overall Ratings:
Up: 8 | Down: 5 | New: 26
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Nomura Securities on Auto Parts Retailers: SAAR More of a P/E Overhang than an EPS One; OKV Numbers Still Look Strong
Analyst, Aram Rubinson, said, "Aftermarket auto parts retailers are typically considered acyclical, or even countercyclical. That is because, as cars age, they require more investment. Our study of the top 100 replacement parts shows that
consumers spend almost 35% more on vehicles aged 8-11 than they do on those aged 4-7. For vehicles aged 12+, the figure approaches 40%."
"In our original analysis, we assumed a SAAR of 14 million from 2012 through 2015. That suggested the number of OKVs would rise by ~8% over three years, before flattening in 2015. Using a 15 million SAAR would lower our growth estimates, but only by 15bp. That is far less than we would have expected."
"Of course, if the SAAR continues to grow, the scrap rate may grow along with it. Scrap rates have tended to be highest during peak SAAR periods (e.g., 2000 and 2001), although the relationship has been less predictable in recent years. We estimate that, for every 10bp increase in the scrap rate, the three-year OKV growth rate declines by ~30bp."
"Ultimately, if the economy continues to recover, we would not be surprised to see the aftermarket group take a back seat to the broader market. YTD, however, that has not been the case, with the group (Advanced Auto (NYSE: AAP), AutoZone (NYSE: AZO), O'Reilly (Nasdaq: ORLY) up about 20%, on average.
We continue to favor AZO (Buy) for its strong underlying cash flow, as well as the potential upside from a successful push into Commercial. In our view, a modest 1% DIY trend together with a 2-3% lift from increased commercial penetration and an aggressive share repurchase could sustain EPS growth of close to 20%."
Analyst, Aram Rubinson, said, "Aftermarket auto parts retailers are typically considered acyclical, or even countercyclical. That is because, as cars age, they require more investment. Our study of the top 100 replacement parts shows that
consumers spend almost 35% more on vehicles aged 8-11 than they do on those aged 4-7. For vehicles aged 12+, the figure approaches 40%."
"In our original analysis, we assumed a SAAR of 14 million from 2012 through 2015. That suggested the number of OKVs would rise by ~8% over three years, before flattening in 2015. Using a 15 million SAAR would lower our growth estimates, but only by 15bp. That is far less than we would have expected."
"Of course, if the SAAR continues to grow, the scrap rate may grow along with it. Scrap rates have tended to be highest during peak SAAR periods (e.g., 2000 and 2001), although the relationship has been less predictable in recent years. We estimate that, for every 10bp increase in the scrap rate, the three-year OKV growth rate declines by ~30bp."
"Ultimately, if the economy continues to recover, we would not be surprised to see the aftermarket group take a back seat to the broader market. YTD, however, that has not been the case, with the group (Advanced Auto (NYSE: AAP), AutoZone (NYSE: AZO), O'Reilly (Nasdaq: ORLY) up about 20%, on average.
We continue to favor AZO (Buy) for its strong underlying cash flow, as well as the potential upside from a successful push into Commercial. In our view, a modest 1% DIY trend together with a 2-3% lift from increased commercial penetration and an aggressive share repurchase could sustain EPS growth of close to 20%."
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