Mr. Cristello: BB&T Capital Markets is a subsidiary of BB&T Corporation, headquartered in Winston-Salem, N.C., and among the nation's top financial holding companies, with over 150 billion in assets. Our capital markets platform has its roots in the acquisition of Scott & Stringfellow, and over the years BB&T Capital Markets has developed in to a full-service platform, offering investment banking, research, and full sales and trading capabilities on both the equity and fixed income side. We are national in our coverage, with offices on both coasts, and we try to manage and generate ideas that are going to be suitable for investors across the country and with different objectives. As far as my coverage group, we are very much focused on the automotive industry, in particular the automotive aftermarket. We believe that our approach to the space is unique in that we follow companies spanning the entire supply chain, from the suppliers to the retailers/distributors and down to the service shops, where many parts will ultimately be installed. We believe that this approach provides us with more of a niche look at trends within the industry, providing us with key insight to developments across the various channels.
TWST: What is the status of the automotive aftermarket sector?
Mr. Cristello: Overall, I believe that the status of the sector remains very
positive, and I think that much of the strength in aftermarket fundamentals
stems from the difficult macro environment that consumers face, particularly as
we entered late 2008 and into 2009. Looking back to last summer, with gas prices
moving well north of 4 per gallon, I think that you certainly began to see a
period of adjustment for the consumer in terms of driving habits. It was a
situation where people began to rely more on public transportation and looked
for other ways to drive their vehicles less, such as streamlining errands,
trying to get a lot more done on one trip rather than coming home and going back
out again. That said, miles driven have just recently begun to turn positive
over the last couple of months and increased 2% year-over-year in June. Part of
it stems from easy comparisons, but I also believe that the consumer right now
is feeling a bit more comfortable as a result of recent stability in gas prices
in terms of how far they are willing to drive and the impact of fuel spending on
their budgets. On top of improving trends in miles driven, another driver of
positive aftermarket fundamentals is that consumers are repairing their existing
vehicles and trying to extend useful life instead of buying new cars. We are
seeing a trend where consumers are putting a bit more of their paychecks into
maintaining their existing vehicles and making necessary repairs, and it is a
situation where the consumer is saying, "You know, if I'm not going to go out
and buy a new car anytime soon and need this car to last for another two or
three years, what can I do to extend its useful life and allow me to be able to
keep this vehicle on the road longer?" At the end of the day, I simply believe
that new vehicle sales are likely to remain under pressure until consumers feel
confident enough in their job stability and in their ability to spend. And in
the meantime, I think they are likely to focus on maintaining what they have.
The next extension of this is how consumers are actually approaching their
automotive maintenance and repair needs, and it seems that many are looking to
do more of the repair work on their own, such as oil changes and brake work and
other "do-it-yourself" oriented repairs in an attempt to save money. In other
instances, you are seeing consumers choose to trade away from dealership service
on vehicles that are no longer under warranty and instead looking to find a
local professional installer that they trust, which oftentimes is 30% cheaper
than the new vehicle dealership. It is also important to put this in perspective
with what's going on with the vehicle population today, as almost half of the
250 million cars or so on the road are 8 years old and older. That's a big
number and there are significant implications to the aftermarket because when
vehicles age and you start to hit 8, 9, 10, 11 years old, you begin to see much
higher rates of critical parts failure, such as starters, alternators, ignition
parts, brake calipers. These components are often critical to the drivability of
that vehicle, and as they begin to fail incremental demand is created,
particularly in this environment where we think that many consumers are more apt
to spend the 200 bucks to handle the repair, as opposed to taking on a new car
payment. The consumer, in many instances, that's driving an older vehicle may
simply choose to take that 200 hit today, and while it can seem like a lot, it
is likely more cost-effective than taking on the burden of a new monthly
payment.
Tickers included in this excerpt: CPRT, LKGX, MDS, MNRO, ORLY, SLH
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