The automotive market is dealing with inflation-driven headwinds, however one sector of automobile retail seems to be good proper now.
The inventory market has gotten off to a scorching begin in 2024. Each the S&P 500 and Nasdaq Composite have gained roughly 11% on the backdrop of sturdy tailwinds within the know-how and vitality sectors particularly.
Regardless of a powerful inventory market, there are some challenges within the macroeconomy which can be powerful to disregard. Specifically, inflation has remained cussed and unusually excessive in comparison with historic ranges. This may make assessing funding alternatives fairly tough.
One approach to probably achieve an edge available in the market is to have a look at what firms and themes institutional traders are exploring. Dan Loeb is a well-respected hedge fund supervisor, and the CEO of funding agency Third Level. After intently taking a look at his newest 13F submitting, one transfer particularly actually caught out to me.
Loeb scooped up 1.5 million shares of Superior Auto Elements (AAP 0.22%). Contemplating the present financial setting, shopping for an automotive inventory may appear to be a nasty concept.
Nevertheless, I believe this transfer is genius. Let’s break down what is going on on within the auto trade proper now, and assess why Superior Auto Elements seems to be like a profitable alternative — particularly in an inflationary setting.
The automobile market is dealing with some tough headwinds
Over the past 18 months, the Federal Reserve has raised rates of interest 11 instances in an effort to curb inflation. Consequently, automobile producers, in addition to resellers like Carvana or CarMax, have confronted some headwinds.
In different phrases, rising rates of interest have induced shoppers to cut back spending, inflicting stock ranges to rise at automotive retailers. This dynamic has led to a backlog of extra stock and slowing gross sales for automobile companies.
Picture supply: Getty Photographs.
Superior Auto Elements is in a singular place
Whereas client discretionary spending is strained proper now, there are some areas which can be seen as inflation proof. One instance of client spend that’s extra proof against inflationary headwinds are present in companies which have pricing energy.
Typically talking, firms have pricing energy when their services and products are in excessive demand — whatever the state of the financial system. Which means even throughout powerful financial intervals, sure companies nonetheless witness sturdy demand.
Inside the broader automobile market, firms that promote automotive elements, tools, and upkeep providers are seen as inflation proof. The explanation? Effectively, as mentioned, shoppers aren’t precisely racing to purchase new automobiles throughout instances of excessive inflation or rising rates of interest. Subsequently, folks typically select to carry on to current autos for longer.
Superior Auto Elements advantages from this dynamic. Even throughout instances of excessive inflation, automobile house owners nonetheless must improve sure features of their autos and get inspections.
On condition that Superior Auto Elements would not have a lot competitors from different varieties of automobile retailers proper now, the corporate is in a singular place in that it nonetheless sees demand and has leverage over the patron because it pertains to pricing.
Is Superior Auto Elements inventory to purchase proper now?
The chart beneath benchmarks Superior Auto Elements in opposition to some friends within the auto tools market on a price-to-sales (P/S) foundation. At a P/S a number of of simply 0.4, Superior Auto Elements is buying and selling at a noticeable low cost to its friends. Whereas this may give the looks of an undervalued alternative, there are some vital objects to additional focus on.
AAP PS Ratio information by YCharts
The chart beneath illustrates quarterly income and gross revenue developments at Superior Auto Elements during the last a number of years. It is fairly apparent that its enterprise is not precisely linear. However, I nonetheless see the inventory as a compelling purchase for a number of years.
AAP Income (Quarterly) information by YCharts
First, the disparity amongst valuation multiples in comparison with the competitors is hard to miss. Whereas this alone would not essentially make it a price play, I am inspired by Loeb’s validation of Superior Auto Elements over alternate options.
Second, whereas the enterprise itself has demonstrated some volatility, I really assume there’s some regular development on the horizon. Whereas the Federal Reserve has hinted at decreasing rates of interest this 12 months, traders nonetheless have no idea when or if that can occur, and to what diploma.
For these causes, I believe tools retailers like Superior Auto Elements will proceed to see outsize demand in comparison with different automobile companies. In idea, this could result in some sustained accelerated development.
Lastly, whereas inflation has cooled off, the present price of three.4% continues to be a lot increased than the Fed’s long-term goal of two%. So long as inflation stays cussed, I see a enterprise reminiscent of Superior Auto Elements as well-positioned amongst broader alternatives within the automotive market.
