Jeff D. Opdyke

Here’s today’s number to consider: 481,587.

That’s the number of new cars and trucks sold in America in July – the lowest reading since at least 2005. Even during the Great Recession, monthly sales never dipped below 650,000, and more commonly ranged between about 800,000 and 1.2 million.

In light of where the economy looks to be headed, the July reading offers a hint at where we might be looking for an investment these days: auto parts.

Back in the Great Recession, the average vehicle in the US auto fleet was just over 10 years old. And during that period, Wall Street went bonkers for auto-parts companies, recognizing rightly that unemployed and under-employed Americans wouldn’t have the free cash flow to spring for new cars and, thus, would have to keep their old beaters alive by springing for replacement parts and repairs.

So it was, then, that even amid flagging new-car sales, auto-parts retailers surged. AutoZone (AZO), O’Reilly Automotive (ORLY), and, Advance Auto Parts (AAP) gained 200%, 185%, and 168%, respectively from the depths of the recession in 2008 to the end of 2010. And, frankly, 2010 is just an arbitrary date. In reality, these retailers’ shares continued to sprint higher until the pandemic attacked. At one point, AutoZone was up nearly 1,000%.

Today, auto-parts retailers are just now returning to their post-pandemic levels. They’ve all moved between 65% and roughly 100% since their March lows.

https://eeon.com/chart-builder?range=6M&symbols=AAP,AZO,GPC,ORLY

Thus, history would seem to a pretty good analog for the future facing these retailers. Because this time around, the landscape is even bleaker, which, in this Bizarro World, is good.

The US auto fleet is now 12 years old on average, meaning cars and trucks demand even more replacements parts and repairs to keep on keeping on. Moreover, far more Americans are out of work these days (roughly 20 million vs. less than nine million). That’s a lot more car and truck owners who don’t have the income stream to afford a new vehicle.

Assuming Congress steps up with additional stimulus money to keep American families solvent until the pandemic passes, snapping up some exposure to auto-parts retailers is likely a good, long-range play. Demand for after-market auto parts will only rise from here, and that plays directly to these retailers’s bottom lines and, thus, their share prices.

You could own any of them really, but I’d gravitate toward Genuine Parts (GPC), if only as a value-for-money play.

Genuine Parts doesn’t have the sexiest growth rate. Its profitability trails its peers. But this is a rising-tide-lifts-all-boats situation. It’s like buying the cheapest house in the best neighborhood – it’s going to do well just because of location.

Here’s what the four key players look like at the moment, based on a few, standard yardsticks:

None are particularly overvalued, though  O’Reilly’s and AutoZone’s out-of-whack price-to-book ratios aren’t particularly encouraging. What stands apart, however, is Genuine Parts’ sub-one price-to-sales ratio (cheap by any measure) and a dividend yield approaching 3.3%. Those potentially give you some measure of downside protection in a broad-market selloff, particularly the yield. (Plus, in the inflationary, zero-rate world we’re likely moving toward, grabbing a decent bit of income isn’t such a bad strategy).

The real risk: Congress fails to provide struggling American families with additional and ongoing stimulus payments. If that happens … well, all bets are off. People will do all they can to keep a roof over their head and food in their kid’s belly, and they’d put off all but the most-necessary auto repairs – meaning auto-parts retailers would suffer.

Short of that, however, Genuine Parts (and its peers) likely has an open road ahead.


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