VVV - What would it take for a bull case in the auto repair and services sector?
2023-11-07 10:06:03 ET
The automotive aftermarket retail sector could have its bull case for 2024 if gas prices decline, consumer spending increases, inflation stays up, pricing continues to be high, and supply chain tailwinds drive leverage.
Citi Research’s Preliminary 2024 Themes and Sector Outlooks report, published on Tuesday, highlighted that consumer trends have weakened and will worsen in 2024 if rates go higher and unemployment gets worse.
In addition, Citi analysts said that 2024 will be “a year with more price competition as the consumer hunts for value.”
Similarly, positioning for stocks will likely shift to be risky once rates peak and estimates are close to trough, the report said.
For the auto aftermarket retail sector — Advance Auto Parts ( NYSE: AAP ), AutoZone ( AZO ), O'Reilly Automotive ( ORLY ), Valvoline ( VVV ) — the report underlined its bear, base, and bull cases.
In a bear case, gas prices would have to rise quickly and weight on vehicle miles driven, consumer spending would need to decrease, putting off non-essential repairs, services, and upgrades.
In addition, disinflation would affect auto parts worse than expected as pricing power deteriorates. New and used car pricing would decline, causing consumers to trade up their existing vehicles. Also, supply chain developments would remain margin headwinds, and wage inflation would need to be high and limit the ability to leverage selling, general, and administrative expenses.
In a bull case, gas prices would decline, “resulting in sequential savings for the consumer and a tailwind to vehicle miles driven,” Citi analysts said.
Also, consumer spending would increase, auto parts inflation would continue to run higher than normal, new and used car pricing would continue to be high, causing consumers to drive their existing vehicles longer, and wage inflation would be less than expected, allowing for SG&A leverage.
In a base case, gas prices would stay the same, consumers would continue to prioritize auto repairs and services as a necessity, auto parts disinflation would ease slowly, new and used car pricing would stay consistent or ease up, the supply chain would remain neutral to gross margins, and wage inflation would stay high but be “manageable for retailers to drive flattish to slight SG&A leverage.”
More on Advance Auto Parts:
- Advance Auto Parts: Cheap For A Reason And An Uncertain Future
- Advance Auto Parts: Another Retailer Stuck Between 'A Rock And A Hard Place'
- Advance Auto Parts: New CEO Will Have His Work Cut Out For Him
- Advance Auto Parts slides after S&P downgrades debt to junk status
- Advance Auto Parts names former Home Depot executive as CEO
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What would it take for a bull case in the auto repair and services sector?