U.S. light-vehicle automotive sales reached a record 17.4 million in 2015 and are forecast to rise 2.3% in 2016. Despite automotive sales at record highs, the stock performance of manufacturers such as Ford (F) and General Motors (GM) has not been great. The major reason for lackluster performance is inconsistent profit performance. Profits have been strong recently, but a close look at the past several decades reveals why some investors don’t trust these stocks.
The recent entrance of Telsa Motors (TLSA) to the marketplace creates excitement. While Telsa’s stock has been a star since going public in June 2010, the company has yet to report a profit. Valuations are off the charts. According to Reuters, Tesla trades for $620,000 for every car they delivered in 2015 and $63,000 for every car it hopes to produce in 2020. GM trades for $4,800 for every car they produced in 2015. While not scientific, this shows that Tesla has large growth expectations built into their valuation.
Auto supply and service companies have recently outperformed manufacturers. For example, AutoZone (AZO) has nearly doubled its revenue in the past 10 years, quadrupled profits and increased its stock value by a factor of nine in that same period. O’Reilly’s Automotive (ORLY) has seen similar growth metrics. These two companies are large-caps, but our approach to micro-caps is the same: Focus on suppliers and service companies. Here is one of our favorites and why.
U.S. Auto Parts Network (PRTS) together with its subsidiaries operates as an online retailer of aftermarket auto parts and accessories primarily in the United States, Canada and the Philippines. The company operates through two segments: Base USAP and AutoMD. PRTS offers parts for the exterior of an automobile, engine parts as well as other mechanical and electrical parts and accessories to consumers through its network of online marketplaces. The company also sells and delivers auto parts to collision repair shops from its Chesapeake, Virginia warehouse; markets Kool-Vue products to auto parts wholesale distributors; and operates a retail outlet store in LaSalle, Illinois. Its flagship websites include autopartswarehouse.com, carparts.com, jcwhitney.com and AutoMD.com.
PRTS markets itself as a leading player in the pure-play Internet aftermarket auto parts space. They focus on the Do It Yourself (DIY) customer, reaching 10 million unique visitors a month. They offer over one million stock keeping units and focus on low-cost branded products and private label products they have made in outsourced manufacturing facilities in China.
The DIY category is dominated by brick and mortar retailers like AutoZone, Napa and O’Reilly, which make up 89% of an estimated $49 billion market. PRTS competes for the 11% that is online, currently about $5.5 billion. The DIY market is expected to grow by 4% the next three to five years; the online portion in that segment is expected to grow 20%. Internet sales in the DIY sector are expected to rise to 22% by 2020.
PRTS is focused on margin expansion, eliminating products with negative contribution margins. This is a shift from targeting the top line. They also are expanding private label products, which have higher gross margins. PRTS’s gross margins could improve from the low 20% to mid 30% level within the next few years.
The company has a 64% interest in Auto MD, which serves as an online auto repair source and lead generator for repair shops. They have 3,219 shops in the program and hope to grow that to 5,000 this year. While the lead generations have yet to produce profits, the potential for revenues provides a nice optionality for the stock. PRTS has a clean balance sheet, and its market cap and enterprise value is less than $140 million. With more than $300 million annual revenue and a solid business plan, PRTS is significantly undervalued.