The Flight To Resilient Non-Discretionary Business Models in the Automotive Aftermarket Industry

Favorable tailwinds, steady demand, and consistent cash flows have kept investors highly interested in the automotive aftermarket, according to an industry analysis report released by the Automotive Aftermarket investment banking team at Brown Gibbons Lang & Company (BGL).

The aftermarket parts market is loosely delineated by products that are used for general maintenance and repair and those that are geared toward enthusiast users. Both are very large markets with the Autocare Association estimating the entire aftermarket representing $418 billion. 

COVID had many societal impacts, but one large impact was the large temporary diversion of capital away from indoor experiential forms of recreation to the purchase of discretionary goods. The automotive industry is filled with passionate consumers who invested heavily in their cars during and after the pandemic. This phenomenon created a large sales bubble, much like those experienced in many other enthusiast product sectors, with companies reaching record levels of revenue and profitability. This swing in profitability and the ubiquitous nature of the automotive market (there are 1.19 cars in operation in the U.S. for every licensed driver) drove interest and valuations in enthusiast-related businesses.

At the same time, non-discretionary replacement part businesses saw a momentary decline as stay-at-home orders and a temporary shift to remote working models created a dip in the otherwise stable replacement and collision markets. However, dynamics such as the age of vehicles, rebound in miles traveled, and continued incidences of repairs and collisions have bolstered the non-discretionary market. 

We continue to see no signs of slowing in the collision space. While Advanced Driver Assistance Systems (ADAS) technology is becoming a standard feature of vehicles, the incidence rates of crashes continue to climb. Studies have found that more than a third of drivers turn off features regularly. Automotive accidents are predicted to reach pre-pandemic levels, according to CCC Intelligent Solutions data, with distracted driving on the rise, counteracting the safety elements in the vehicle.

The charts below highlight the dispersion in public valuation multiples for enthusiast businesses versus traditional aftermarket businesses and the valuation gap that opened during the pandemic. As a testament to the industry’s durability, trading multiples for non-discretionary market participants have remained stable and strong while enthusiast businesses have reverted to their historical, still attractive, levels.

Looking for more automotive aftermarket industry analysis from the BGL automotive aftermarket investment banking team? You can download the full 16-page report here for more insights on the recent AAPEX/SEMA shows, the impact of sustainability and the future opportunities in the electric vehicle market.

Our automotive & aftermarket investment banking team has a deep understanding of the strategic, financial, and operational factors impacting middle market companies and has a long track record of success in representing companies in automotive aftermarket M&A advisory. We welcome the opportunity to learn how we can assist you in navigating today’s dynamic M&A environment and to help you maximize your strategic objectives.