The recent policies by Donald Trump has managed to ratchet up concerns about US auto parts suppliers. Particularly, the recently proposed tariffs of up to 25% on Mexico imports, due to the fact that Mexico is the largest exporter to the US of automotive components. On top of that, there’s also the worries of a recession due to the harder line on trade with China.
However, even with those concerns, auto parts retailers like TDot Performance remain safe for investments, to the joy of investors.
Bank of America Merrill Lynch Analyst Liz Suzuki explains that auto parts retailers are a bit further down the supply chain, which means that they’re not importing directly from Mexico as other entities in the chain. This means that companies like TDot Performance don’t get hit as much by changes to the supply chain.
Suzuki’s released a thesis on auto parts retailers, like Autozone, Advance Auto Parts, and O’Reilly Automative note that these kinds of companies are focused primarily on pricing power, regardless of how the economic environment is. In a lot of cases, recessions don’t affect the fact that people need to get their cars fixed and parts replaced to get it working again.
Meanwhile, ride-sharing apps like Uber, means that more vehicles are driving around, which results to increased wear and tear, and have drivers looking for replacement parts more. The Automotive Aftermarket Suppliers Association (AASA) released projections for the industry, saying that big trends like new mobility services and autonomous vehicles could potentially result in an increased 2 trillion global miles driven by the time 2040 rolls around.
Suzuki notes that auto parts retailers are fairly defensive as an industry, as they’re a non-discretionary category. This means that they can go through cost increases pretty well, better than a lot of other industries.
Data shows that auto parts retailer stocks have done better than the S&P 500 in six out of six bear markets by a considerable average of 34%. During the prior month of market turbulence, the stock prices of Autozone, Advance Auto Parts, and O’Reilly Automotive managed to do better than the Dow Jones Industrial Average.