Auto-repair companies to gain from higher maintenance spend

By Eric Yep - Analysis

BANGALORE (Reuters) - Auto-repair companies in the United States are likely to have a smooth ride as a weak economy forces consumers to drive aging cars longer.

Record high gas prices, a slump in housing and tighter credit have steered U.S. auto sales to a 16-year low in July, the ninth straight month of declining sales.

This could give the much-needed boost to professional automotive repair companies, also called the do-it-for-me (DIFM) side, like Monro Muffler Brake Inc (MNRO.O), Midas Inc (MDS.N) and Pep Boys-Manny, Moe & Jack (PBY.N).

In a note to clients last week, J.P. Morgan Securities said DIFM is the "place to be" given the aging models on the road and the need to keep them in working condition.

Automotive repair is a highly fragmented industry and the public chains control a very small percentage of the market.

Cid Wilson of Kevin Dann & Partners put the market share of the three listed companies at less than 8 percent and said auto repair companies are all in the same boat, trying to capture customers, who may be putting off their plans to buy new cars.

Last week, the U.S. Transportation Department said Americans drove 12.2 billion miles less in June from a year ago as high gasoline prices cut highway miles traveled by 4.7 percent, denting a traditionally defensive automobile aftermarket.

However, the aftermarket industry is seeing several other macroeconomic trends turn in its favor, like the rising average age of the U.S. car fleet.

About 56 percent of cars on the road are now at least eight years old, Tony Cristello of BB&T Capital Markets said. With fewer new cars on the road, the existing fleet is entering into a maintenance period that will benefit the aftermarket, he added.

"Older cars tend to need more work, so it stands to reason that even though miles driven are coming down a bit, those cars are going to be serviced more than they would otherwise," analyst William Keller of FTN Midwest Securities said.

The uncertain economic environment forced most consumers to tighten their purse strings and put off maintenance, as some repair works are more discretionary than the others.

But, for a lot of people that choice is gone because they have been delaying maintenance for about two years and with the option of buying a new car remaining a distant dream, all they can do is fix the existing ones, BB&T's Cristello said.

REPAIRS BOOST RESULTS

Analysts are, however, being cautiously optimistic about the sustainability of these positive trends as they see little to indicate a high-growth trajectory for the companies.

"When you look at some of the preliminary results of companies..., it points to the fact that we are seeing some increased sales momentum from people who have been putting off their maintenance and are now beginning to catch up," Kevin Dann's Wilson said.