Monro Muffler Brake (MNRO) is a fast-growing auto services repair provider that has a solid business model in an industry where demand is increasing. Monro has greater growth potential than its larger, more well-known peers, Midas (MDS) and Meineke (private) since it runs under the radar, operates very efficiently, and has consistent operating results. Furthermore, demand for auto repair services is growing as fewer consumers are buying new cars.

Short History

Founded in 1957 as a Midas Muffler franchise in Rochester, NY, the company discontinued its affiliation with Midas in 1966, and diversified into a full-line of undercar repair services. In 1984, with only 59 outlets, and $21 million in annual sales, an investor group purchased a controlling interest in the company and named it Monro Muffler. The company now has 802 stores located in 19 eastern states. Monro service centers are considered number one or two in their markets.  The company operates franchises under the names of Monro Muffler Brake & Service, Tread Quarters Discount & Tire, Mr. Tire, Autotire Car Care Center, and Tire Warehouse. In its fiscal 2010 ended March 31, 2011, Monro serviced 4.3 million vehicles, and generated $637 million in sales.

Increasing Demand for Auto Repair Services

Demand for auto repair services (including undercar repair and tire services), has grown due to the general increase in the number of vehicles registered. This is due to waning public transportation services, and an increase in the number of children of the “babyboomer” generation buying cars. In addition, over the past few years, the average age of a vehicle has risen as consumers, pinched by the 2007-2009 recession, followed by an understated economic recovery, after have postponed the purchase of a new car. In addition, the increased complexity of automobiles prevents the average owner from maintaining the car himself or herself.  At the same time, the number of general repair outlets has declined, mainly because fewer gas stations now perform repairs, and there are a lesser number of new car dealerships as a result of closures by car manufacturers such as Daimler Chrysler AG (DDAIF) and General Motors (GM).

A Winning Expansion Strategy

Monro has experienced significant growth in recent years due to acquisitions and, to a lesser extent, store openings. (It intends to open four new stores in fiscal 2012.) The auto repair industry is a large and highly fragmented arena. Monro has capitalized on this environment by consummating regular non-dilutive and profitable acquisitions. As the industry consolidates due to the increasingly complex nature of auto repairs, higher capital requirements for state-of-the-art equipment, and consumers hanging on to their cars for longer periods, Monro’s efficient, acquisitive strategy should pay off handsomely.  Furthermore, highly cognizant of the general public’s skeptical view of auto repair servicemechanics, who are perceived in some instances to be less than ethical, Monro has gone to great lengths to instill a culture of courtesy, professionalism, and trustworthiness in its service personnel. This image has improved its repeat service rates compared to other operators. Lastly, Monro has targeted areas that are underserved, have relatively large populations, and are centered in regions of the country that have particularly harsh winters.  Although the company’s business is not highly seasonal, customers tend to purchase more services from March through October. With the deteriorating national infrastructure, which is unlikely to improve much anytime soon, we think Monro will continue to see a flood of new and return business, especially from pothole, snow, and ice-related maladies.

Finances

On an annual basis, sales and share earnings have risen by 11.5% and 13%, respectively, over the past five years, and share net is up 34% in the past 12 months. Long-term debt is only 13% of total capital, and cash flow generation is very strong. This suggests to us that Monro has ample financial latitude to continue making acquisitions, which it should efficiently fold into its business model. 

Conclusion

These shares have been rising steadily since hitting a trough of $9.80 in 2008. Indeed, they are up over 350% since then. Total return has been 273% over the last three years and 172% over the last five years. The common dividend, implemented in 2005, has been steadily increased to a quarterly rate of $0.09 a share (paid 12/23/11). Earnings per share were $1.44 in fiscal 2010 (ended 3/31/11) and will probably be between $1.70 and $1.75 a share in fiscal 2011, which ends on March 31, 2012. We look for the top and bottom lines to tally $700 million and $1.90 in fiscal 2012, respectively, and continue rising over the next three to five years.  Institutions own about 95% of the stock, with T. Rowe Price (12%), and BlackRock (7.4%) being the biggest shareholders. Although operating in an unglamorous space, this small-cap company is lean, fast-growing, and has a stable and dependable earnings stream.  

At the time of this report's issuance, the author did not have positions in any of the companies mentioned.