The investment community is one that is said to have a short memory. That may be true, but looking at historical economic trends can help more accurately shape the present and the future.
“All things considered, the last year notwithstanding, the aftermarket has historically been one of the more efficient growth models,” says Dan Smith, president of Capstone Financial Group. “I think the 30-year average is something like 6 percent. There are not a lot of industries in this world that can say that. We don’t ordinarily have that kind of steady growth, so we saw a pretty big uptick probably about 10 years ago in terms of the interest in the industry. People back then realized that the aftermarket was stable and growing and even as Detroit went down, the aftermarket went up.”
Despite today’s economic shortcomings, investors who look at the long-term trends will find that the automotive aftermarket is a solid bet with above-average returns.
But what are some of the trends that have shaped the industry we see today? One would be consolidation, as retailers, manufacturers and distributors have followed a similar path as those in parallel industries.
And more recent merger and acquisition activity has unfortunately centered on what’s referred to as “distressed deals,” where companies sell or merge due to desperation more than growth potential.
Merger and acquisition activity is down from last year, primarily because of the credit markets and diminishment in earnings and revenue in the industry, according to Smith.
Even though consolidation has long been a key trait of aftermarket companies, the number of manufacturers has actually increased, but today’s overall numbers are comparable to those in the past.
“There are probably 50 percent more manufacturers than there were 10 years ago because of the development of new kinds of products, electronics, performance items, more sophisticated exhaust systems and computer chips and on and on,” says Smith from Capstone.
“Five years ago, we probably had about the same amount of companies. We really saw the growth between 1998 and 2005, that’s when we saw the greatest increase in companies. It has grown and now with hard times, of course, a lot of those companies have gone away. So in an ironic set of circumstances we probably have the same amount of companies now as you did in 2000,” he says.
Gabelli & Company, Inc. has held an automotive aftermarket symposium for the past 32 years in Las Vegas, where the firm thoroughly explores the automotive aftermarket as an investment vehicle.
“Consolidation has been the one constant we’ve seen at our conference for the past decade,” says analyst Brian Sponheimer with Gabelli. “The consolidation of the jobber market has led to the rise of the aftermarket retailers. While still a fragmented market, dominant brands have gained share of wallet and mind over the course of the past decade.”
In recent years, Gabelli & Company has expanded the scope of the conference to include publicly traded automotive retailers, along with original equipment suppliers. This year marks the 33rd year of the conference, which will take place Nov. 2 through 4 at the Bellagio in Las Vegas, in sync with this year’s AAPEX show.
While word from the investment sector is mainly positive these days, the aftermarket has had a historical image problem due to its association with similar segments.
“Investment analysis on Wall Street is typically carried out around long-defined silos, and historically many investors did not know what to do with the automotive aftermarket,” says Jonathan Carey, vice president of BB&T Capital Markets. “They lumped the retailers together with other hard-line retailers like Home Depot and would look at aftermarket manufacturers with other industrial manufacturers, or worse, Detroit.
“While it has taken time to develop, smart investors have begun to view the automotive aftermarket as we at BB&T view it and as industry participants have long viewed it – as a standalone industry with its own unique set of growth drivers. This view of the entire channel has enabled investors to identify trends earlier and thereby uncover opportunities that others might simply miss,” he says.
The association with Detroit and the Big Three still continues to tarnish the aftermarket’s image in some investors’ eyes.
The OEM and aftermarket are often lumped together as one “automotive industry” from the view of investors, says Jeremy Thompson, managing director for ONCAP, and an investment banker who has stakes in the Mister Car Wash and Caliber Collision Centers chains.
“Therefore, when the automotive sector is out of favor from the perspective of a lender or a credit officer due to some of the troubles of the manufacturer, the aftermarket is often lumped into this sector.”
Another investment setback is the notion that historically, the aftermarket has been slow to change, says Kristin Newhall, partner for the Riverside Company. “I think it’s historically been slow to change,” she says. “It has taken longer for efficiencies in terms of the supply chain, and in going direct to consumers so it can be sort of slow.”
