Morgan Stanley's 2015 Outlook For Auto Parts Retailers

A recent report by Morgan Stanley focused on the 2015 outlook for do-it-yourself auto parts retailers. Despite many potential headwinds for the sector, analysts remain bullish on a handful of top names.

The Bear Case

There has been a high historical correlation between the DIY auto sales and the size of the 7-13 year-old car parc (the number of cars currently being driven). Analysts project about a 5 percent reduction in the size of this critical number in 2015.

If historical correlations hold, this reduction is a bad sign for the DIY auto sector. In addition, the sector has already outperformed the overall market during the past decade.

The Bull Case

While analysts admit that top-line growth could slow in 2015, they see many reasons why a reduction in car parc could be offset. Technological advancements that extend the lifetime of modern cars might also be expanding the upper boundary of the car parc “sweet spot” to higher than 13 years. Evidence that car owners drive modern cars longer can be seen in the recent reduction in scrappage rates.

Analysts also see the potential for consolidation in a highly fragmented DIY space that could lead to a better, less competitive pricing environment in the future.

Finally, lower gas prices free up disposable income that can be spent on DIY car improvements.

Stock Picks

Morgan Stanley analyst Simeon Gutman believes DIY auto investors will have a good year. “We think fundamentals and market expectations should be conducive for DIY Auto stocks to work in 2015.”

Morgan Stanley’s picks in the space include Advance Auto Parts, Inc. AAP, Autozone, Inc. AZO and O’Reilly Automotive Inc ORLY.