Farrell: Market Opportunities in Auto Numbers

Did you know India has 0.01 car per person?

Mike Ward of Soleil/Ward Transportation Research had a fascinating conference call the other day with R.L. Polk consultants. In addition to learning that India has 0.01 car per person, other trivia are that there are 0.14 cars per person worldwide. The U.S has 0.83, Western Europe 0.60, Japan 0.58 per person, and China 0.03. You can see where the market opportunity is!

Light vehicles 10 years or older on US roadways are expected to grow 1.9% a year for the next four years, says Polk, so the average age will peak at 9.37 years in 2012 versus 7.97 in 2000. According to their forecast, if a new car is bought today, it will be owned for 56.3 months and had it been bought in 2002, it would have been owned for about 49 months. I love stuff like this. We are owning cars longer. Since the US has about one quarter of all light vehicles on the road today, the repair opportunity is enormous.

Two stocks that Mike would recommend to play the opportunity would be Genuine Parts (rated Buy; last sale: $37.90: 52-week range: $44-$25) and AutoNation (rated Buy; last sale: $19.21; 52-week range: $21-$4). Genuine Parts has some unique history to its story. The company has raised its dividend 53 years in a row and now pays a $1.60 dividend for a 4.2% yield. Revenue has been up 57 out of the last 58 years and profits have been up 44 out of the last 47 years. This current environment has challenged even this management team as profits will be down this year. The company gets about half its revenues from automotive parts and supplies via the NAPA brand. Professional mechanics and commercial customers are about 75% of NAPA's business. Distribution of industrial parts to the paper and forest products industry, food processors, and the iron and steel industry account for about a third of revenues, and office products distribution roughly 16%. Mike figures the company has traded at an average of just under 15 times earnings for the last 10 years. He estimates GPC will earn $2.45 in 2009 (down from $2.92 in 2008) and $2.75 in 2010. Mike has a price target of $38, but if the scenario plays as expected, he notes that we could see a resumption of earnings growth and a nice total return opportunity when the dividend is added in.

AutoNation is known as the largest collection of car dealerships in the U.S. But parts and service will likely account for about 50% of profits this year. (I find it remarkable to talk about profits for any company that deals in new cars.) Management has been aggressive and astute in cutting costs and paying down debt. Revenues from the 296 dealerships totaled about $14 billion in 2008, down 19% from the prior year. Mike expects revenues of around $10.5 billion this year and $1.00 in earnings. He estimates a rebound to more than $12 billion in sales for 2010 and $1.25 in earnings. The group has historically traded at 12-14 times earnings, and with the company's strong balance sheet ($500 million in LTD and $2.4 billion in equity) and superb management team, Mike believes AN deserves a bit of a premium to the group for a target price of $23.

The only piece of economic data released Wednesday was the mortgage applications number, which was an increase of 5.6%. The interest rate on the average 30-year fixed rate mortgage fell to 5.15% for the week from 5.38% the prior week. It is interesting to note the almost-immediate response in applications to changes in interest rates.