The Euphoric Loop – 18th February 2015


QMG highlighted the risks to the US auto part retail sector (US50.3) back on 5th January 2015 (Link – Country Focus List Update – United States), adding short positions in Advanced Auto Parts (AAP US) and Genuine Parts Co (GPC US) to our US focus list. AAP shares fell 7% following the Q4 update, reporting a higher mix of low-margin commercial sales in Q4 and providing a downbeat earnings outlook.

QMG warned that US auto parts retailers were the weakest ranking product group across the US market. As detailed in the chart below, our observations show volumes and prices both falling and costs rising – the worst combination – and our data shows that this sector is a significant underperformer relative to the broader set of all US retail product groups. We warned that the persistent decline in volumes across the year to date does not look like easing and we expect this to put more pressure on future selling prices, and thus caution that margins will remain under pressure. We also warned that this negative backdrop does not appear to be factored in to consensus forecasts, resulting in the addition of SHORT positions in AAP and GPC. As detailed in our recent US update (5th Jan):

• Advance Auto Parts (AAP US) – ADDING SHORT POSITION. We added a SHORT position in AAP to our focus list on 22/10/14 only to be stopped out on 4/12/14 after the share price had moved +10% away from our entry level. Whilst the consensus forecasts are skewed by recent corporate activity (the $2bn acquisition earlier this year of General Parts International) we still see this stock as the ‘purest’ play on this product group and see the current share price – which has the group trading on a c20% premium to historical EV/sales multiples as being far too optimistic given the challenging sector backdrop. As such, we are adding a SHORT position in AAP to our focus list for Q1 2015.

• Genuine Parts Co (GPC US) – ADDING SHORT POSITION, consensus forecasts for GPC are well above the levels that QMG data shows across this US product group. In particular, consensus sales growth of +13.2% compares with a -0.8% QMG observation and the consensus views that margins will increase by +60bps compares with the QMG observation that margins across this product group are decreasing by -218bps. Additionally, we note that the shares are currently trading on 1.1x EV/sales, which is a 40-50% premium to the trailing 3 and 5 year average (0.79 & 0.71 respectively). We see downside to consensus estimates and thus add a SHORT position in GPC to our focus list for Q1 2015.

GPC reported overnight, and while Q4 earnings were largely in line with market expectations, the share price is down c9% from the initiation of QMG’s short position. We will have further details on US Auto Part Retailers (and the 90 sectors that we cover in the US market) next week in QMG’s monthly report for January.

US Auto Parts Retailers (US50.3) – Price, Cost & Volume


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