Auto Parts Supply Chain Consolidation Over Next 12 to 18 Months Will Result In Tigher Margins As Regional Store Density Increases

• On 9:36 am EDT, Wednesday September 9, 2009

67 WALL STREET, New York - September 9, 2009 - The Wall Street Transcript has just published its Auto Parts Report offering a timely review of the sector to serious investors and industry executives. This 21 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Increase in Profit -- Brand Mix -- Cash for Clunkers -- Well Positioned Companies -- Automotive Aftermarket -- Expanse of the Market -- Sector Status -- Positive Outlook -- Aftermarket Fundamentals -- Macro Environment -- Organic Sales Results -- Earnings Growth

Companies include: Toyota (TM); Ford (F); Honda (HMC); Johnson Controls (JCI); BorgWarner (BWA); Tata Motors (TTM); Daimler (DAI); Advance Auto (AAP); Pep Boys (PBY); AutoZone (AZO); O-Reilly Auto (ORLY); Monro Muffler (MNRO); LKQ Corporation (LKQX); Copart (CPRT); Solera (SLH); Midas (MDS)

In the following brief excerpt from just one of the five interviews in the 21 page report, "World's Top Analyst" Anthony Cristello discusses the outlook for the sector and for investors.

TWST: Have there been any supply chain problems?

Mr. Cristello: None that we've really seen. We've had various bankruptcies over the last couple of years, but the real test, I think, will come later this year, moving into some of the slower months at the same time that sales levels revert back to more reasonable levels, as I think Cash for Clunkers did exert somewhat of a pull-forward effect on July sales. So from that standpoint, I think you are likely to see some disruption as the year progresses, as cash flow and working capital needs start to get a little tighter to manage, and production volumes may just not be high enough to float companies over until the macro improves. That's what I think will really will hurt you on the parts side of things. And looking out over the next six to 12 months, as dealerships close and access to the OE channel for parts partially dries up, we see somewhat of a catalyst to the traditional aftermarket suppliers and the aftermarket retailers and distributors.

TWST: What other challenges are there out there for the sector?

Mr. Cristello: I think that some of the smaller aftermarket suppliers are worried about the potential for some of the larger manufacturers that traditionally have been more exposed to the automakers, stepping into their marketplace because of the opportunity for growth. In as much as an influx of additional competitors puts downward pressure on pricing, I think this presents some modest headwinds to the aftermarket manufacturing base. I would expect more consolidation among suppliers in the next six to 12 or 18 months, and ultimately this should yield a healthier manufacturing base. In terms of the distribution channel, a number of the larger retail chains and parts distributors continue to expand and build density across the country. And as a result, I think that some of the more regional-based, independent parts distributors are seeing tougher competition. With more national players popping up, I think it's just going to cost more in margin to compete. So I think, competitively speaking, you're going to just see the landscape evolve further over the next six to 12 months, as well with further consolidation likely.

TWST: What are your top picks in the sector?

Mr. Cristello: When looking at top picks, I think you have to take time horizons into consideration. And depending upon the time frame, one company may make a better investment than another. But if I look out 12 months from now, I think O'Reilly Automotive (ORLY) is a company that is going to be very well positioned to take advantage of a lot of these positive macro trends, in addition to their internal growth drivers. Bigger picture, I just think ORLY is a story that makes a lot of sense. Looking to the installer side of the business, a segment which is likely to benefit from people taking their cars outside of the dealer network for their service and repair needs, I think that Monro Muffler (MNRO) has a lot of potential. The company is well positioned from a geographic standpoint and has a very solid track record of expansion and industry consolidation. And so I think MNRO is another name to watch. Our coverage also extends to the collision repair space, and the challenging macro environment has certainly pressured certain facets of the collision repair sector, as declining miles driven has led to somewhat lower accident levels on top of consumers opting not to have their cars fixed in order to avoid meeting deductible requirements. It has also been a situation where depressed residual valuations for vehicles had led many insurance companies to simply total-out vehicles instead of paying for repair work. That said, the collision repair environment has exhibited signs of stabilization of late, and I expect many of these trends to reverse over the next six to 12 months as well. So I think that the collision repair space also offers some interesting opportunities, and I think LKQ Corporation (LKQX), Copart (CPRT) and Solera (SLH) are all stocks worth watching.

TWST: What about the other extreme? Are there companies out there that are still struggling?

Mr. Cristello: I wouldn't say struggling to the point where there are companies that are going to go away, but there are still some in the aftermarket that are underperforming at the moment. Midas (MDS), a national chain of service shops, is somewhat struggling with driving same-store sales results right now, and I think the challenge faced here is tied to the nature of its franchise-based model. As a franchise operator, you don't always have the full extent of control that you would like with your dealers in order to implement and put in place strategies across your network that you think are appropriate for this type of operating environment. While the top third of Midas shops are performing extremely well, there have been some challenges with other portions of its retail base, and so I think this is an example of one company that's probably not fairing as well as others right now.

TWST: Tell us about your background.

Mr. Cristello: I've been following the aftermarket for, I guess, over four years, and I've been in the business since 1994. I began following the consumer sector, covering companies such as Williams-Sonoma and Amazon, and a number of other names in the consumer retail arena. Then I switched over and worked on the transportation side of the business, following the airline sector for a while. And that was an interesting area to be in; this was back in the early 2000s - 2002, 2003, 2004, that kind of time frame. This was right after a number of airlines really started consolidating, with a number filing Chapter 11, and you really began to see the lowest-cost carriers emerge. I then transitioned over to the automotive aftermarket and have been following this group ever since. So I have had exposure to a fairly broad mix of industries, and I think this diverse coverage has, for the most part, been positive in that it has given me different looks at different cycles across various markets.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 21 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

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