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Why Did Some Auto Parts Stocks Start the Quarter in the Red?

Zacks Equity Research

Some major auto part manufacturers started the journey into the second quarter of 2017 in red. O'Reilly Automotive, Inc. ORLY and AutoZone, Inc. AZO were downgraded by Cleveland Research and saw their share prices declining 4.1% and 3.1%, respectively, on Apr 4. Meanwhile, Advance Auto Parts Inc AAP, CarMax Inc KMX and Genuine Parts Company GPC also witnessed declines of 1.9%, 4.3% and 2.2%, respectively.

These companies face a number of concerns that may impact their financial results.

Weak Vehicle Sales

A number of auto manufacturers reported U.S. sales, which came in weak. The U.S. light-vehicle sales fell 1.7% year over year in March with decline in sales at Ford, Honda, Toyota among others more than offsetting the increase at Nissan and General Motors.

On a SAAR basis, annualized sales rate declined to 16.6 million, coming below expectations and the lowest pace of sales since Feb 2015. This decline has come amid rising discounts by auto makers to promote sales.

While these manufacturers bear the brunt of the weak sales, auto part producers are anticipated to face headwinds due to this decline. Lower sales imply fewer parts that would need to be replaced, indicating low future sales for these companies.

Per Cleveland Research, auto part manufacturers may also suffer currently as there are fewer vehicles that need to be repaired due to the low sales during the last recession.

DIY Trend Weakening

Cleveland Research has also reported weakness in demand from do-it-yourself (DIY) customers, which is likely to lead to a fall in comparable store sales for companies such as O'Reilly and AutoZone. Weak comp sales were witnessed in February as well as March, lowering outlook confidence in the sales for 2017.

Moreover, increasing products offered at Walmart and Amazon add to the pressure faced by the companies.

Expected Decline in Used Car Prices

Morgan Stanley has projected the decline of used car prices by 20% over the next four years, and may also go as low as 50%. This expected decline is supported by the near end of lease terms for vehicles, which would then be sent back to car dealerships thereby increasing the supply of used cars. The competition is expected to help lower prices.

Moreover, recently the auto industry has been experiencing a boom with car sales increasing consecutively for seven years. The large inventory of new vehicles is indicative of the fact that the requirement for used vehicles will be lower.

The Industry’s Performance

In the past year, the Zacks classified Automotive - Retail and Wholesale - Parts industry has underperformed the broader market. While the industry has lost 2.5%, the S&P 500 has gained 15%.

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