THE TD COWEN INSIGHT
The long-term auto aftermarket outlook is positive, supported by secular tailwinds, attractive industry dynamics, and market share opportunity. Our proprietary survey suggests industry pricing dynamics remain rational.
FACTORS DRIVING AUTO AFTERMARKET GROWTH
We initiate coverage of the auto aftermarket industry. Four factors should drive ongoing +3-4% normalized industry growth, solid margins and dollar growth, growing ROIC, and shareholder returns.
1) The industry is steady and defensive. It benefits from cyclical and counter-cyclical dynamics that drive growth through the cycle with good visibility.
2) Growth is underpinned by six secular tailwinds including increasing miles driven, parts complexity, growing, and aging car parc. Additionally, the industry is experiencing a multi-year benefit from increasing vehicles entering the “sweet spot” as they age and roll off manufacturer warranty.
3) Industry is rational as retailers can pass through input cost increases, while its non-discretionary nature results in low promotions.
4) Increasing parts complexity drives an ongoing structural shift to the more fragmented DIFM (do-it-for-me) channel from DIY (do-it-yourself).
DIFM SURVEY TAKEAWAYS
The aftermarket industry is currently in the midst of its biggest controversy in years, which is a deviation from their typically stable nature. There are concerns they are entering into a margin degrative price war to grow share in the DIFM channel. We conducted a proprietary survey of 100 DIFM garage professionals which suggests concerns are overblown and the industry is healthy.
1) Inventory availability is the most important requirement for retailers.
2) Price investments help but aren’t driving Pro share growth on their own.
3) DIFM appreciates inventory availability and speed.
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