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Tuning Up Your Portfolio: Part 2

Tuesday, 19 Aug 2008 | 11:17 PM ET

Monro Muffler is another great way to play the growing trend in American car ownership, Cramer said.

Talking MNRO
Giving his take on Midas and Monro Muffler, with Mad Money host Jim Cramer.

Consumers are holding on to their vehicles for a lot longer, it appears. And that’s creating a strong market for parts and services companies. Cramer made a case for this thesis, and parts seller O’Reilly Automotive, and used this segment to highlight Monro .

There are only two pure-play auto mechanics: Midas and Monro Muffler. But despite what you may think, Cramer said, its Monro that has the golden touch here.

Cramer attributed it largely to geography. Monro has a stronger base in the Northeast, which has been coping with the market slump better than Midas’ Western and Southeastern customers. Midas even mentioned on their quarterly conference call that the Northeast garages they had were outperforming those in other locations.

But Monro’s executes well, too. The company reported an earnings beat last quarter and exceeded the 3% to 5% guidance they offered for their comps, or same-store sales, growing 5.6%. And despite raising prices, traffic at Monro grew 2.5%. This just strengthens Cramer’s thesis that people are spending more to keep their cars running longer, he said.

Another thing worth noting here is that Monro upped its comp guidance from 2.4% to the 3% to 4% range even though comps to date as of July 24 were 8%. Cramer’s betting this is a classic case of underpromise, overdeliver. So an earnings blowout is not out of the question next time around, he said.

Much in the way O’Reilly Automotive is making acquisitions, Monro is as well. In fact, this company’s made nine in the last six years. The latest, Procare, has been integrated well and is outperforming, and there’s talk of another purchase on the way.

Best of all for investors in Monro is the idea of scarcity value. Cramer’s thesis on auto-parts sellers isn’t a secret on Wall Street and big money managers are going to be looking for places to put their money. Since there are only two plays, Midas and Monro, this bodes well for the latter. These managers won’t be afraid to pay up for the better stock, Cramer said.

A word of caution: Monro Muffler is a very small company, with a market cap of only $375 million. The stock dropped $1.20, or 5.6%, to $20.14 on Tuesday, but you need to be careful. Use limit orders, buy in small increments. You know the usual Mad Money approach. Ignore these rules and you could miss any gains Monro has to offer.



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