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My go-to exercise during COVID-19 has been a late-afternoon walk alongside a popular creek. To get there, I cross one of Melbourne’s busiest tollroads.
Ever the journalist, I have watched peak-hour traffic patterns on the road since COVID-19 began. In the early weeks of the crisis, traffic was scarce. Last week, traffic was noticeably busier and almost at a standstill on Friday peak hour. For once, hooray for traffic congestion!
Anecdotes aside, Google data shows a rapid recovery in traffic movement. At the low of the downturn, when people stayed mostly at home in mid-April, traffic was 64% down on pre-COVID-19 levels. Now it is only 24 per cent lower on early March levels.
Also, Apple data shows requests for mobility information are up sharply since the mid-April trough. Like many, Apple’s Siri is getting back to work after a COVID-19-induced break as more drivers ask the intelligent assistant for road directions.
That is good news for a traffic-related stocks and for investors who think laterally. The benefits of higher traffic volumes extend beyond auto companies and tollroad operators, to fast-food companies (with drive-through outlets) and petrol-station landlords.
Although these are good signs, care is needed with this trend. Traffic is a long way from pre-COVID-19 levels but could get there in a hurry as schools reopen and other restrictions are eased in coming months. Even Victoria is starting to re-open some facilities.
Also, talk that Australians will avoid public transport in favour of their car is speculation. The international experience shows usage in China, Japan and other countries recovering from COVID-19 has fallen amid health concerns of mingling in crowded train carriages.
Back home, State Premiers are urging people to walk or cycle to work if possible, opening up extra lanes for them and turning public spaces into carparks in anticipation of higher car usage over public transport. The question is how long this trend will last.
Short term, many more people will likely use their car to commute to work because they are fearful of public transport health risks or worried about lack of options as buses, trains and ferries take fewer passengers, to comply with social-distancing rules.
Longer term, it is hard to imagine commuters favouring cars as much when congestion grows, city car parking is scarce, and health concerns over public transport fade. More people working from home could also reduce traffic demand, so do not bet on this sustained large shift from public transport.
Moreover, retail auto stocks are worrisome, even after horrendous share-price falls. The sector struggled before COVID-19 and will do so after. Nervous consumers can easily delay their next car purchase or even ditch their household’s second car as the economy stalls.
Another threat is lower used-car prices in the next 12 months. Global rental-car pioneer Hertz cited falling used-car prices (which reduced its fleet value) as a reason it filed for bankruptcy this month. There could be a lot of extra used-car stock on the market over 12-18 months.
I would hate to be an auto dealership as more consumers focus on feeding their family and meeting home-loan repayments before thinking about a new car. Falling house prices – and the ensuing negative “wealth effect” – will also weigh on auto sales.
That said, AP Eagers has more than doubled from its 52-week low of $2.50 at the peak of COVID-19 panic and MotorCycle Holdings and luxury-car dealership Autosports are also up a little after shocking falls. The ever-reliable ARB Corporation is another on the recovery trail.
Still, there are lower-risk ways to play the short-term rebound in traffic volumes outside the auto retail sector. Here are four strategies to consider:
Readers of The Switzer Report will recall I added Transurban Group (TCL) and Atlas Arteria (ALX) Group to the April 15 COVID-19 ideas list – coincidentally in the week traffic movement troughed, according to Google and Apple data. Each looked badly oversold.
I wrote: “Both companies look well placed to weather the COVID-19 storm and their sector should be among the first to benefit as industry restrictions are relaxed and traffic volumes rebound. But the market has priced a more severe and longer traffic downturn into these stocks. That is an opportunity for long-term portfolio investors who understand the benefits of owning infrastructure assets, particularly in a low interest-rate environment.”
Transurban has rallied from $12.28 to $14.64 since that story. Atlas Arteria is up from $5.56 to $6.98 after jumping this week. Gains will be slower from here, but both stocks still warrant a spot in long-term portfolios at current prices.
Chart 1: Atlas Arteria Group (ALX)
More people using cars over public transport to commute to work, at least in the next 12 months, means extra wear and tear on vehicles. That is good news for parts providers such as Bapcor and Super Retail Group, owner of the popular Super Cheap Auto accessories chain.
I have written positively about Bapcor (BAP) for this report many times over the past few years. It is among the market’s higher-quality mid-cap stocks and its business model of providing same-day parts for auto mechanics appeals. Bapcor’s mechanic network is hard to replicate.
After plunging from about $7 to almost $3 during the crisis, Bapcor has rallied to $5.77. It has further to run, at a slower pace, as the market factors in higher traffic volumes and parts demand. Some consumers might delay car services, but it is hard to avoid car repairs.
Super Retail Group (SUL) is an interesting play on this trend. I wrote in this column two weeks ago that it is a possible takeover target. Super Retail is up from $6.65 to $8.14 since that story.
Even without a takeover (the company’s integrated back office and supply chain across its brands might deter suitors), Super Retail has long-term appeal.
The company’s auto-accessories chain is a beneficiary as higher car usage stimulates parts demand or encourages “backyard mechanics” who change oil filters and the like.
I believe COVID-19 will encourage “driving holidays” and rising interest in nature holidays, hiking and outdoors sports. That is good news for Super Retail’s BCF (Boating Camping Fishing), Macpac (outdoorwear) and Rebel Sport divisions.
Higher traffic volumes also suggest vehicle collisions. Listed panel-beater AMA Group is a potential beneficiary, but the stock has had its problems.
It is too big a stretch at this stage to buy AMA, but it is worth watching by contrarian investors who understand the nuance of small cap investing and can tolerate higher risk.
Chart 2: Super Retail Group (SUL)
I included Collins Foods (CKF), owner of KFC stores, and Domino’s Pizza Enterprises (DMP) on the COVID-19 ideas list on April 7 for this report. Collins has rallied from $5.57 since that story to $7.82 and Domino’s is up from $49 to almost $60.
The idea was simple: in a struggling economy, more consumers will swap from restaurants and gourmet takeaways to cheaper options such as fried chicken and $5 pizzas.
Also, COVID-19 will, sadly, be the deathknell for many struggling small fast-food operators and possibly even some larger gourmet takeaway chains. Will as many people pay $20 for a burger and chips or plate of Portuguese chicken as before COVID-19? KFC and Domino’s could increase their market share at the expense of smaller rivals.
Rising traffic volumes should also benefit Collins and Domino’s as consumers who commute to work and back by car favour ready-made meals. Collins’ drive-through format is leveraged to this trend (so, too, McDonald’s for those who own US stocks).
Some key US fast-food stocks have reached new highs during COVID-19 as the market reassesses their prospects. Collins and Domino’s are due for a breather after recent share-price gains, but both offer solid rather than spectacular value for long-term investors.
A takeover bid from a global fast-food chain or private-equity firm for Collins in the next few years would not surprise, such is the strength of its Australian franchises.
Collins probably picked up new customers during COVID-19, judging by high downloads of the KFC App.
Chart 3: Collins Food (CKF)
I wrote favourably about petrol-station owners Waypoint REIT (formerly VIVA Energy REIT) and APN Convenience Retail REIT (AQR) for this report in early February – well before COVID-19 was a factor here.
APN Convenience fell from $3.75 at the time of my report to $2.39 during the peak of the COVID-19 selloff and has since recovered to $3.26.
Both REITs have a long weighted-average lease expiry profile and reasonable gearing. Both should benefit from rising vehicle usage over the next 12 months and higher petrol-station demand.
As I wrote in February, population growth and city densification are positive trends for petrol-station valuations and use, given many sites have valuable locations.
After tanking in early COVID-19, more cars on the road mean more sales of petrol, drinks and snacks. The reopening of schools nationwide in coming weeks will be another tailwind to support petrol-station rents and property values.
APN Convenience Retail REIT, the smaller of the two, looks the best pick at current prices. APN this week confirmed its distribution guidance – a good sign in this market – and bought two Coles Express outlets.
Chart 4: APN Convenience Retail REIT (AQR)