One U.S. sector should fair reasonably well in just about any economic climate: automotive undercar repair and tire service, which is why I'm Reiterating my Buy rating for Monro Muffler Brake Inc. (NASDAQ: MNRO), first recommended on March 27, 2009 at a price of $26.01. Monro's stock has not progressed as much as expected when first recommended in March, but the sector's fundamentals and U.S. economic conditions remain favorable for MNRO. Pinched budgets means new car sales will not return to normal levels any time soon, which means many Americans will be driving their five-year and eight-year used cars longer and needing increased maintenance, to Monro's benefit.
Look for revenue to increase 7-9% in FY2009, and at a double-digit rate in FY2010.
Further, Monro will also benefit from the increase in used cars sales – they'll need more maintenance, too – as prospective car purchasers are kicked-down to the used car lot for budget or for lack of low-cost financing reasons. The First Call FY2009/FY2010 EPS estimates for MNRO are $1.46 to $1.77.
The risks with MNRO? Ironically, a better-than-expected U.S. economic recovery in 2010 would hurt Monro, as it would increase new car sales, eliminating a portion of the company's business.
Stock Analysis: Monro Muffler Brake Inc. is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in MNRO now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your MNRO position before December 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.
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