While it's hard not to look back at 2006 and worry that as gas prices rise, the aftermarket might edge closer to another period of soft trends and increased deferrals, we think 2007 has been and should continue to prove to be a better year. Yes, gas prices will impact miles driven in the near term and ultimately the repair cycle. That said, there has been markedly less "shock factor" at the pump this year as we think most drivers now factor summer gasoline in excess of $3 a gallon into expectations.
In fact, we believe it would take a period of sustained $3.50 a gallon gasoline (maybe even a psychological $4 level) to recreate the challenging operating environment seen in 2006. The bright spot, in our opinion, is history shows that over the long run, underlying fundamental trends in the aftermarket prevail, and near-term volatility typically yields to long-term stability. It is against this backdrop that we expect aftermarket momentum to build, moving into the peak summer months as the significant number of maintenance deferrals from 2006 should begin to translate into demand for parts and services.
So while gas prices unfortunately are something we can't control, we think there are some bigger issues facing the aftermarket that present opportunity. When examining the list, including direct sourcing, hybrids, right to repair, "new vs. reman" and consolidation to name a few, there is one in particular that comes to mind that we think belongs at the very top: foreign nameplates.
We think the market share shift toward foreign nameplates will continue to change the dynamics of the industry for years to come. While General Motors and Ford scramble to overcome a slowdown in demand for large SUVs, Toyota and Honda remain focused on closing the share gap through innovative product offerings and continued brand awareness efforts. Foreign vehicle owners tend to be more affluent and more accustomed to seeking out the dealer for service repairs.
With imports, the complexity of vehicles and difficulty in the actual diagnostics simply make do-it-yourself (DIY) repairs more of a challenge. We think the increase in imports likely means fewer potential opportunities for the DIY segment and should send a signal that more exposure to the do-it-for-me (DIFM) segment (technicians pay attention) is likely to provide greater levels of growth in the coming years. For professional techs, competing with the dealers is nothing new, but to garner share with imports, we think a renewed focus on training and up-to-date diagnostics will be crucial. But perhaps even more important will be an emphasis on customer service. For distributors and manufacturers, it's in everyone's best interest to help the technician succeed, and we truly believe there will be a silver lining to this increase in foreign imports.
This is yet another example of how, along with advances in technology, global manufacturing and increased competition, the aftermarket continues to evolve. The opportunity is there for the taking, and those participants willing to embrace the changes will be successful and capitalize on what we view as an industry with very predictable and stable levels of long-term growth.
BB&T Capital Markets is a full-service investment banking firm focusing on specific industries, including the automotive aftermarket. It is a division of Scott & Stringfellow, Inc., NYSE/SIPC, a registered subsidiary of BB&T Corp.
