Have Auto Service Centers Peaked?

The value of aftermarket automotive service businesses may arguably never be higher than they are now.

Leaked details of a potential Mavis process at Golden Gate, a rumored recap of Monro, and recent aggression by GB capital, combined with rising rates, ongoing Covid-19 driven downside and a strong tailwind shift to electric all add up to a net negative for the sector looking forward.

Last week, most financial outlets, led by Bloomberg, reported that Golden Gate is considering a sale of its Mavis business in a deal that could fetch as much as $6B.  While no final decision has been made, according to the anonymous source, Mavis is reportedly working with an outside advisory firm to explore a number of options.  

Elsewhere, Monro, now with over 1,400 outlets is rumored to be evaluating recapitalization options as well.  With its CEO seat open since August and an activist investor creating discomfort for Monro’s historically conservative board, a change could be in the works in Rochester.  

Completing 5 deals adding 55 new locations in 2020, GB Auto contributed to stable multiple values in the sector last year, perhaps masking what was, by all accounts, a very difficult year in the space.  Given that there is a significant amount of dry powder capital waiting to be employed and, as yet, a large number of Top 100 dealers in the segment to be consolidated, we may be seeing a shift to a buyer’s market underway.

Interest rates are moving higher. The 20 year T-Bill which spent most of last year trading between $0.98 and $1.28 is now trading at $1.65. It was cheap money that in part facilitated stratospheric multiples like that paid at Les Schwab. As rates go up, expect multiples to tumble.

Poor industry fundamentals will likely further chip away at values.  The initial IHS estimate for the OE light vehicle SAAR for 2021 is 15.1 million vehicles, a 600K increase vs. 2020 and a figure most industry executives believe is either on target or too conservative.  Pumping an increase of over a half-million new vehicles or more into the economy this year will negatively impact aftermarket service usage.  As will a rate of Vehicle Miles Traveled stuck below 2019 levels.  The US government estimate for 2021 VMT at 8445.75, while an increase over 2020 levels, remains 6% below the 2019 rate. As consumers continue using their cars less, the demand for service will likewise remain depressed.

Finally, the impact of increased electrification is expected to be a net headwind for aftermarket service. While the tire sector may see some temporary gains, overall, electrification is a net bust for service outlets.

In 2018, the number of electric vehicles (EVs) on U.S. roads was about 1 million.  New EV sales were about 232,000.  According to the Edison Institute, by 2030, the EV parc in the U.S. is expected to have grown to 18.7 million, or 7% of vehicles in operation. In 2030, Edison expects 3.5 million annual new EV sales, fully 20% of all new car sales.  With the election of Joe Biden, sweetened consumer subsidies for EVs and even tighter automaker CAFé standards are expected, which will only accelerate the pace of EV gains.

EVs are a net positive for tire. The tire-related gains are driven principally by faster wear and premium pricing. However, expect some of the price-related tailwind to dissipate over time.

Electric vehicles are a potential boon for tires owing to their weight, torque profile and the lower noise requirements imposed by the vehicle OEs on tire makers.  Comparing a Hyundai Kona EV to its internal combustion engine (ICE) counterpart: The Kona EV weighs 800 pounds more and produces 160 feet pounds more torque.  Using a Chevrolet example, comparing their Spark to the Bolt: The Bolt is 1,250 pounds heavier and also produces about 160 feet pounds more torque than its ICE counterpart.  These increased demands on the tire, though offset to a certain degree by more efficiently delivered traction control algorithms, lead to faster tire wear – a tailwind to the aftermarket.  Zohr, an on-demand tire replacement service, has reported 30% faster wear for EV tires compared to comparable ICE vehicles.  

The tires themselves are also more expensive.  The OE Nexen 215/55R17 Kona EV tire is sold by Simple Tire for $110.98.  The 205/60R16 Nexen tire for the ICE Kona is sold by Simple Tire for $81.98.  Comparing more like for like sizes, using 205/60R16, again 92H, and comparing Nexen’s N Blue EV to their N Blue HD, there is a 17% difference in price between the two at Simple Tire.

Too, as apart from EV, there is no significant tech advancements on the horizon for tires, the tier 1 tire makers are scrambling to use electric-specific tires as a margin differentiator.  Since, for the last several years, features that the large tire makers used to call HVA now appear in virtually every tire made in every tire plant everywhere in the world, the industry is settling back into a phase where again, a tire is a tire.  By engaging in such differentiation as typing “Elect” on the sidewall, as is being done at Pirelli, these larger tire makers are hoping to convince consumers (and carmakers) that tires engineered specifically for electric cars should command a premium.  The problem is that the "EV-Specific" technology – firmer sidewalls, tread blocks engineered for less noise, and tread designs and additives for mileage – is nothing new; so, don’t expect EV tires to be a phenomenon only found in the big 3 or 4 tire makers.

So, as more electric vehicles are made, and as more tire makers perfect EV specific technologies, expect more and more tire makers to jump in the EV replacement tire pool.  This will place pressure on prices.  So, like multiple values in the segment, I expect that EV tire values are as high today as they are likely going to be.   But there’s still the higher replacement frequency to hang a hat on.

Unfortunately, what’s gained in tire replacement frequency though is more than lost in other routine maintenance items like brakes, oil changes, spark plugs, belts, and filters.  According to AAA, consumers, on average spend about $1,200 on routine maintenance alone per vehicle annually.  So, for each EV sold, that’s $1,200 out of the aftermarket economy each year.  The Tesla owner’s manual lists only the following for maintenance: cabin air filters, brake fluid testing, and A/C service – all every 2 years – and Winter Care every year (simply cleaning and lubricating brake calipers.)  That’s almost nothing.

So, what’s it all add up to?  Looking ahead, a sluggish recovery in the sector coupled with a buyer’s market, rising interest rates, electrification, and poor industry fundamentals is likely to drive downward pressure on forward multiples.  I like the staying power of the segment.  It’s not going anywhere.  Neither is the internal combustion engine.  However, it’s not growing and there is no trend on the horizon to suggest that it will.  In my opinion, values will never be higher than they are right now.

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