Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Some combination of better made cars, and less Americans able to pay new car prices has conspired to push up the average age of U.S. vehicles to a new record high. Reflecting this sea change, one of the best investment groups the past 3-4 years has been the automotive aftermarket retailers, headlined by Autozone (AZO).
Traditionally these stocks would rally more during recessions and then weaken in recoveries. But as a bevy of issues has changed the long term fortunes of the American middle class (plus the removal of the “house ATM” i.e. cash out withdrawal from mortgages), we appear to have a change in this group from a cyclical growth story to secular. It is also further proof that much of the economic ‘recovery’ is happening in the upper 20-30% of the population, who derive about half the spending in the country.
Ford (F) reported this morning and while EPS missed estimates, revenue came in sharply (10%) over estimates. During the heydey of the house ATM mid decade, the U.S. car market was north of 16M in annual sales. That dipped to about 10M in the depths of the Great Recession, and has now rebounded to a 12-13M range. Auto makers of course have responded (along with the cutting of costs during the bailouts) and now are quite profitable even at this much lower range of auto sales. If we can even see a rebound to the 14-15M range, the U.S. automakers should be spitting out profits. (Keep in mind the new wage system in place is replacing a lot of $28-35+/hour type of works with $14 new hires)
- The average age of a car or truck in the U.S. hit a record 10.8 years last year as job security and other economic worries kept many people from making big-ticket purchases such as a new car. That’s up from the old record of 10.6 years in 2010
- ….in 1995…. the average age of a car was 8.4 years.
- However, Polk Vice President Mark Seng says that a rebound in sales last year and expected growth for the next couple of years is likely to slow the growth rate in the age of cars as a whole in America. Polk has not predicted if or when the age will start to drop, but Seng doesn’t see that happening for at least two or three years, if not longer. “It’s going to take the good economy several years of very high sales again, and people being willing to let go of those older vehicles that they’ve been holding onto,” Seng said.
- Last year, auto sales rebounded a bit to 12.8 million vehicles, especially in November and December, when sales were unusually strong. In 2010, U.S. sales totaled 11.6 million after hitting a 30-year low of 10.4 million in 2009.
- But even a 1 million per year sales increase will have little impact on the average age because there are more than 240 million cars and trucks on the roads in the U.S., Seng says.
- Shares of major auto parts stores, such as AutoZone Inc., O’Reilly Automotive Inc. and Advance Auto Parts Inc., have easily outpaced the S&P 500 index since late 2007 when the recession began.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
