Auto Parts Companies Performing Satisfactorily

Profits Won't Come from Car Sales
There are 10 large-, mid- and small-cap stocks in the S&P 1500 Automotive Retail subindustry index, two of which are not followed analytically by S&P equity analysts. Two of these index components have favorable investment recommendations: Advance Auto Parts (AAP), which carries a 5 STARS (strong buy) ranking, and O'Reilly Automotive (ORLY), ranked 4 STARS (buy). Auto Nation (AN), with a 2 STARS (sell) opinion, is the only member with an unfavorable investment ranking.

S&P equity analyst Efraim Levy, CFA, says S&P's fundamental outlook for the automotive retailers subindustry is negative, with a greater-than-normal amount of dealerships closing, including more than 900 in 2008. S&P expects hundreds more dealership to disappear in 2009. With the residential housing market tumbling, a more difficult credit environment, and lower consumer confidence, S&P expects reduced demand for big ticket items such as cars. However, bright spots include the sharp decline in gas prices to less than $2 per gallon, from a peak above $4, and the Federal Reserve including new-car dealer floor-plan loans in a $200 billion program, as this should help prevent some dealership failures.

Most auto retailers generate their sales and profits from four different operations: new vehicles, used vehicles, parts and services, and finance and insurance. New vehicle sales typically have the lowest operating margins, but drive business for more profitable finance and insurance sales and parts and services. With its forecast for lower new vehicle sales, S&P expects retailers to focus on generating more business from the remaining categories to offset lower new vehicle profits.

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