We undertook the unenviable task of reading the proxy for every company under coverage (and one we don’t cover: TSLA).
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Using Return on Invested Capital as a lens, we take a look at which companies and sub-industries capture the highest returns within the automotive value chain. We calculate ROIC across 27 companies within industries including dealers, OEMs, parts suppliers, aftermarket retailers, and service providers.
In the AM AZO reported Q3 2018 results. SSS of 0.6% missed Cons of 2.3% and our 2.2% as a short quarter/odd fiscal convention left it over-exposed to weather weakened Mar/Apr. EPS of $13.42 beat consensus of $12.95 and our $12.94. However, commentary on SG&A re-investments/wages/comps were alarming. AZO was down -10% vs S&P flat.
Yesterday (5/9/2018), Sears (not covered) announced a partnership with Amazon (c/b S. Mushkin) to sell and install any brand of tire at Sears’ 400+ Auto Center locations. In Feb. 2018, Amazon began carrying Die Hard starters, chargers, and Gold AGM batteries (expensive). Stock reaction was mixed with the group only modestly trailing (+0.5%) the S&P 500 (+1.0%).
This AM (02/27/18), AZO reported Q2 2018 results. SSS of 2.2% met Consensus/our estimate but we believe was weaker than the buy side bar. Op margins of 16.5% (not adjusting for IMC/Autoantyhing) missed Consensus of 16.7% but beat our 15.9%. EPS missed by more but had noise due to taxes and numerous adjustments. Shares are down -11%.
Most of you cover 50 – 200 stocks and therefore don’t have the liberty of being as into the weeds on every name – that’s our job. To help you do yours, we have created a comprehensive, but chart-heavy, guide to our coverage that is meant to have shelf life and that can be referred back to when you are ready to dig more into our coverage.
Auto part retailers were down -30 to -42% through August but are up +17 to 47% since. To gauge current analyst expectations, we surveyed buy side investors to sort out top ideas, relative positioning, and near-term expectations for comps. We also tackled contentious topics including weather, the impact of the 09-11 SAAR air pocket, AAP margin trajectory, tax reform, and valuation methodology.
The tax overhaul is adding a lot of complexity to fundamentals as investors and companies we speak with struggle to digest consensus expectations and current valuation metrics. We sifted through both Factset and Bloomberg estimates to calculate a bottoms-up consensus of ONLY analysts that have revised estimates on tax reform.
In our first tax reform note we studied numerous angles on tax reform. As a continuation, we are studying additional angles and also adjusting numbers and price targets (Exhibit 1). While we remain concerned of the long-term risk/reward of tax reform, near-term we expect consensus EPS revisions to occur as the rewards are easier to forecast than the risks.
After years of inflating asset prices via credit let’s unwind QE, raise interest rates, meddle in regional wars, reduce homeownership incentives, rush a radical tax overhaul including reducing corporate taxes, rebalance personal taxes, and expanding the fiscal deficit, all during a period of trough unemployment. Let’s just throw all of the economic models out, nothing can go wrong here, I’m psyched let’s go shoot some birds
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