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Big red bow, no new car

Monday, January 18, 2010 - 01:00

Santa has been watching. For the aftermarket, 2009 started with cautious optimism and ended with an overall sense of relief. Resiliency and the industry's overall defensive nature overcame financial crisis. In 2009 it was one of the top performing industries. There is a growing sense of optimism among most participants that 2010 could in many ways be an even better year than 2009.

So what did Santa leave in the aftermarket’s stocking? At the top was a dose of unemployment. The job market has been tough during this macro downturn and we question whether the administration’s stimulus has done anything to create jobs. One might argue that the Obama administration views the literal “health” of the nation as more important than finding new jobs for the unemployed. Fortunately, American consumers can’t run up the same debt levels as the government. The financial crisis has tempered spending and encouraged savings. In our opinion, the high level of unemployment is likely to continue throughout 2010, leaving consumers with constrained budgets. This should lead to sustained positive DIY trends and further trade away from higher priced dealers toward welcoming independent aftermarket installers.

Wrapped in sparkly paper was an increase in miles driven. Beginning in June 2009, miles driven started to show year-over-year increases. We expect positive miles driven reports at least through next May. Gas prices will be key to recovery, along with OPEC production. We think as long as the average price per gallon remains below the “psychological” $3 level, miles driven trends will continue to surge. Although the 12-month average miles driven for September was the highest to date in 2009, it was still over 100 billion miles fewer than the peak in 2007. That would imply almost another 4 percent in miles driven growth is needed.

So we have a big red bow, but no new car. The Seasonably Adjusted Annual Rate (SAAR) has been a hot topic in 2009, whether stemming from Cash for Clunkers impact, theGM and Chrysler bailout or reduced consumer demand due to budget constraint. A recovery to levels seen in the past will be slow. SAAR for 2010 may be up modestly from 2009 but the turmoil in the dealer network along with a price-sensitive consumers should keep volumes high in 2010 for the independent installers.

Luckily, one is never too old for Christmas. The average vehicle age is approaching the 10-year mark and with new vehicle sales likely to remain depressed, we envision the age to continue to climb. Factor in favorable miles driven trends and the likelihood that critical parts such as alternators and starters are likely entering failure rate “sweet spots,” and demand for both DIY and DIFM channels should remain robust.

The 2010 outlook is much better than a lump of coal. Essentially we think the majority of the aftermarke should once again have a good year. We expect to see DIY demand remain solid at least through the first half of 2010. Much of the recent strength in DIY trends has been supported by the struggling macro environment, and particularly high unemployment rates. At some point our economy will heal and the urgency to repair a vehicle out of necessity will diminish, pushing more demand toward the DIFM channel. We think jobbers, installers and WDs should benefit from the dealer fallout and DIFM sales in general should once again widen the gap relative to DIY. Manufacturing should remain stable as demand for hard parts and more collaborative efforts across the supply chain keep business steady. We continue to think the tire segment should be robust given the weak demand for tire replacement over the past couple years. At the end of the day, we think the Obama tire tariff did little more than cost the consumer a lot of money. Essentially, tire prices are likely to be up 10 percent and likely to cost consumers an additional $2-3 billion.

So, no coal in the stocking? We think the major potential detractor from favorable fundamentals will be surges in gasoline prices and thus fewer miles driven. For now, we don’t anticipate a strong economic recovery in 2010, although we expect some improvement relative to 2009. Just remember that nearly 50 percent of the 250 million vehicles on the road are 8 years old or older, providing the aftermarket with a very substantial demand base for maintenance and repair moving into 2010.

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