First, consider the affordability crisis that created these unusual dynamics. The average payment for a new car rose to $730 in March, up 27% from before the Covid-19 pandemic. Used car payments are up 34% over the period to $541. According to an old rule of thumb, you shouldn’t spend more than 10% of your net after-tax pay on your auto pay, so you’d need to make more than $100,000 a year to afford a new average. car (or around $75,000 for a used one).
The result? People are keeping their cars longer and auto sales are well below pre-pandemic norms. As the chart below shows, only the parts business continues to post top-line revenue moving steadily up and to the right.
Unfortunately, it already comes at a price. Shares of AutoZone Inc. and O’Reilly Automotive Inc. they are trading at all-time highs and some of the richest forward earnings multiples in recent history. Both stocks are close to analysts’ consensus 12-month targets, indicating that there simply isn’t much room for them to rise further for now.
At least some of the optimism is due to trade sales to auto shops, which can be less mercurial than one-off sales to DIYers. In a recent note, Barclays Plc analysts Seth Sigman and Oliver Hu noted that credit card spending appeared to be more resilient at auto service stores than at parts and accessories stores. At AutoZone in particular, Barclays analysts said, the company’s recent market share gains in the commercial business are the fruits of a long process, including significant investment spending that they believe is now behind them.
Still, the risks feel skewed to the downside at these share prices. Even in the absence of the recession many economists fear is coming, some data suggest lower-income consumers are already starting to struggle with rising debt and defaults. Tax refund season is usually a boon for auto and parts consumption, but data from the Internal Revenue Service shows this one has been a letdown. On a longer horizon, there are also questions about the impact of electric cars (they have fewer moving parts than internal combustion engines, which wouldn’t be such a big deal if you were in the business of repairing and replacing components.)(1) Ultimately instance, however, the underlying revenue generators for auto parts retailers – an aging stock of cars on the road, unaffordable new car prices and high interest rates – should remain in place for at least a little while longer . From an investor’s point of view, the main problem with stocks is that the word is out.
More from Bloomberg Opinion:
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• Stock Cassandras and Pollyannas Stuck in Limbo: Jonathan Levin
(1) Both Barclays and Wedbush (at least) mention this among the risks to their price targets.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Jonathan Levin has worked as a reporter for Bloomberg in Latin America and the US, covering finance, markets and mergers and acquisitions. Most recently, he served as head of the company’s Miami office. He holds the CFA.
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