At Monro, they won't give you a brake, but they'll sell you one

With the U.S. economy in a pronounced recession, new car/vehicle auto sales have slumped badly, and for obvious reasons: high unemployment, consumer belt-tightening, and concern about the economy's future performance are hardly the stuff that inspires citizens to rush in to new car show rooms. And the above has created decent business conditions for, you guessed it, auto repair services.

Don't misunderstand: people are belt-tightening with repairs too and putting off maintenance, but one trend is clear in this recession as it has been in previous ones: if they have even limited resources to do so, car owners will maintain their used cars in difficult times. In most case it's their only source of transportation, and they also know that their next new car purchase may not occur for a long time. The First Call FY 2009/FY 2010 EPS estimates for MNRO are $1.20 to $1.43.

In general, analysts see a 6-9% revenue increase for Monro in FY 2009, led by strength in brakes. The tires and exhaust system lines should perform adequately as well. A strong U.S. geographic footprint also is appealing.

Further, Monro will likely benefit from a structural change in the U.S. economy, to a 'frugal consumer.' Typically, new cars sales would jump with the start of a recovery: that may not be the case this time, and the only way Americans can have a reliable set of wheels is to maintain and hold on to their used car longer; so far, they're doing exactly that, which bodes well for MNRO.

Stock Analysis: Monro Muffler Brake is a moderate-risk stock. Consider buying a 25% position in MNRO now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your MNRO position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $17.

- -


Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.