Expenditures on aftermarket parts and services are able to maintain a degree of stability despite inflationary pressures, making the sector is an attractive investment
The automotive aftermarket continues to prove its resiliency in the face of economic headwinds, changing driver habits and the continued encroachment of electric vehicles — hybrids, plug-in hybrids (PHEVs) and battery electric vehicles (BEVs). With purchases of new and used vehicles softening over the past couple years, the U.S. car parc continues to creep upwards in age.
As a result, expenditures on aftermarket parts and services were able to maintain a degree of stability despite inflationary pressures, thus making the aftermarket parts and services sector is an attractive investment environment for private equity investors searching for growth investments.
Since the economy emerged from the impact of COVID, new and used vehicle sales continue to lag versus broader economic trends. Prior to COVID, year-over-year quarterly expenditures on vehicles for the five years ending 2019 averaged 1.5% growth for new vehicles and 9.9% for used vehicles.
Excluding the COVID year of 2020 and the post-COVID bump in 2021 when consumers re-emerged from their homes with dollars to spend, the average year-over-year quarterly expenditures for 2022 – 2024 declined to -0.9% for new vehicles and -4.9% for used vehicles. Multiple factors contributed to weakened sales ranging from supply chain disruptions to consumers focusing on home expenditures as they sheltered in place, but one of the largest and most durable impacts was Americans shifting to working remotely from home work, thereby significantly decreasing annual miles driven that only recently recovered to pre-COVID levels.
Towards the end of 2014, the annualized rate of miles driven in the U.S. topped 3.0 trillion miles for the first time and over the ensuing five years continued to increase at an annualized rate of 1.6% such that by March 2020, the month COVID lockdowns commenced, U.S. driving had achieved an all-time high of 3.25 trillion miles.
However, once COVID lockdown effects took hold of the economy the annualized rate dropped precipitously to 2.83 trillion miles by February 2021, a rate last seen 20 years prior to COVID in July 2002. The combined impacts of Americans working remotely and going out less often to socialize meant that it wasn’t until September 2023 that the annualized rate had recovered to a level exceeding March 2020 when the rate reached 3.25 trillion miles.
As a result of the decline in miles driven in conjunction with softening sales of new vehicles, the average age of vehicles in the U.S. carpark has recently accelerated, and a historical review of age trends in the U.S. car parc portends a near-term continuation of aging up for U.S. cars.
In 2023, the average age of U.S. light vehicles peaked at 12.5 years, a 30% increase from 9.6 years in 2002. However, as demonstrated by the trailing five year compounded annual growth rate (CAGR), the average age increase has not been linear but instead has grown in fits and starts. For most of the 20 years, the trailing 5-year CAGR was less than 1.0%, but as the economic shock of the Great Recession possessed a lagging impact, it took several years for the full effect to be realized.
In the case of the Great Recession, the full impact was not realized until 2013 when the 5-year trailing CAGR for average age growth reached 2.5% with a subsequent decline to a trailing 5-year CAGR of 0.7% by 2020. Post-COVID, the 5-year trailing CAGR for average age growth crept up again and crossed the 1 percent threshold in 2023, and if the COVID-recession follows the same trajectory of lagging impact as the Great Recession, the U.S. car parc is poised for more growth in average age over the next couple years.
Looking forward, one major disruptor to the automotive aftermarket sector, especially the service component, appears to have been overblown. The threat from electric vehicles, especially BEVs, ended up not being nearly the threat that many presupposed. When our firm represented a major quick lube franchisee a year ago in the sale of their business, many potential investors cited concerns about the BEV encroachment as a reason for passing on the opportunity, but as time passed and news came out about missed sales numbers by BEV manufacturers and major automakers shelving EV plans, the tone from potential buyers of our client changed to a recognition that BEV dominance of the U.S. car parc is many years away.
As a result, PHEVs that require the same services as internal combustion engines are now seen as more likely being the default for U.S. consumers looking for an electric vehicle, and now with a change in administration in Washington that is less friendly to targeted EV goals, the projection of BEVs growing from a current penetration rate of 1.5% of new car sales to 15% by 2035 is looking less likely.
As a result of the foregoing economic, demographic and government regulation factors, the automotive aftermarket presents an attractive investment opportunity. As demonstrated by the expenditures on parts and services for the same periods pre- and post-COVID as cited above for new and used car sales, quarterly expenditures on parts and services on a year-over-year basis averaged 3.8% for the five years ending 2019, trailing used vehicles average expenditures of 9.9% but outpacing new vehicle average expenditures of 1.5%.
But in the post-COVID period starting 2022, quarterly expenditures for parts and services averaged 1.3%, reflecting the only positive average quarterly growth rate when compared to the declines of -0.9% for new vehicles and -4.9% for used vehicles. That’s the kind of resiliency that makes investors feel comfortable in times of uncertainty and change.
Anthony Lopez-Ona is a Managing Director at Mufson Howe Hunter, a leading name in investment banking specializing in M&A advisory, private capital raising, and corporate finance services for nearly two decades. With a strong focus on the middle market, the firm has successfully completed over 600 transactions. Headquartered in Philadelphia with an office in Washington, D.C., Mufson Howe Hunter is known for its deep industry knowledge and client-centric approach. Visit Mufson Howe Hunter online at https://www.mhhco.com.
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