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As New Car Sales Decelerate, Parts Retailers Shift to a Higher Gear

8 September 2013 in Trading Ideas

Is the boom in new auto sales finally hitting the skids?

Last week, the three major US auto manufacturers all announced disappointing monthly sales, due in part to low inventory of some popular car models.1

Ford said a tight supply of its popular Fusion midsize sedan and other models “muted” the company’s sales increase in July. It ended up selling about 193,000 vehicles last month, below analysts’ consensus expectations of 200,000 vehicles.

General Motors sold around 234,000 autos and trucks, but Wall Street was looking, on average, for sales of 243,000 vehicles.

While the inventory problem could certainly suggest a one-month outlier, it’s worth noting that the combined results had RBC Capital Markets analyst Joe Spak translating the annual sales rate for July to 15.4 million, below analysts’ average forecast of 15.8 million.

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In addition, as the Zero Hedge blog pointed out, the combined sales figures represented both the biggest drop – and biggest miss vs. analyst estimates – in nine months.2

So, is that it now in terms of better-than-expected growth in the US auto market? Well, not if you look at the recent quarterly results from major auto parts retailers.

Take a look at O’Reilly Automotive, for starters. Its second-quarter profit jumped 21% from a year ago as sales rose 10% on same-store sales growth of 16%. The company also said it was on track to open, on a net basis 190 new stores in 2013.3

In similar fashion, scrap parts retailer LKQ Corp. beat Wall Street’s second-quarter profit expectations as revenue rose more than 24%.4

Investors have spent the past month bidding up the stocks of both O’Reilly and LKQ, as well as AutoZone, which delivered mostly in-line results in its latest quarter, but has buoyed traders’ hopes recently by announcing an additional $750 million stock buyback plan in June.

used car tune-upShares in those three companies also comprise a 43% weighting in the Used Car Tune-up motif, which is up 4.8% in the past month. During that same period, the S&P 500 has gained 3.6%. The motif is up 28.6% so far in 2013; the S&P 500 has risen 17.5% this year.

It’s noteworthy that the most recent earnings reports from auto parts retailers predated the recent hiccup in new-car sales, which have been strong for months, up until July. More importantly, even though new-car sales have been trending up, the average age of US cars on the road still hit an all-time high of 11.4 years in 2013.5

That would be a trend worth notifing for auto parts distributors – and their shareholders.

1Ben Klayman and Deepa Seethamaran, “GM, Ford, Chrysler July Auto Sales Fall Short of Forecasts, dailyfinance.com, Aug. 1, 2013, http://www.dailyfinance.com/2013/08/01/gm-ford-chrysler-july-auto-sales-fall-short/, (accessed Aug. 6, 2013).

2Zero Hedge, “Domestic Car Sales Miss, Biggest Drop in Nine Months,” Aug. 1, 2013, http://www.zerohedge.com/news/2013-08-01/domestic-car-sales-miss-biggest-drop-9-months, (accessed Aug. 6, 2013).

3Zacks Equity Research, “O’Reilly 2Q Earnings Surge 37%,” July 25, 2013, http://finance.yahoo.com/news/oreilly-2q-earnings-surge-37-132002144.html, (accessed Aug. 6, 2013).

4LKQ Corp. earnings announcement, Aug. 1, 2013, http://finance.yahoo.com/news/lkq-corporation-announces-record-results-110000158.html, (accessed Aug. 6, 2013).

5Associated Press, “Average age of cars in U.S. now 11.4 years,” Aug. 6, 2013, http://www.foxnews.com/leisure/2013/08/06/average-age-cars-in-us-now-114-years/.