Monro Muffler Brake Inc. is a quality company trading below intrinsic value. The company is a leading provider of automotive repair and tires services that has been growing steadily during these turbulent times. Sales have been growing by low single digits and they are opening new stores to meet growing automotive service demand. The company saw non-tire categories grow in the mid single digits with total gross margin increasing to over 39% in its latest quarter. Last quarter was particularly difficult for the company, as warmer than expected weather resulted in lower tire sales than the same time last year. For the first nine months, net income grew by high single digits while sales grew by over 5%.
What is the story on Monro?
The key for the company will be continued consolidation in this space given the significant amount of segregation by independent dealers, which is a large reason for the company increasing liquidity via its new $600 million credit line. Fiscal 2016 acquisitions completed year-to-date represent a total of over $30 million of annualized sales and include Car-X which is a franchise of locations in ten different states. The company is also driving positive momentum technically to support its fundamentals: the company is 1.51% above its 20 day SMA, 5.48% above its 50 SMA and 4.05% above its 200 SMA. Further, the organization does a good job of creating value with its +32% Return on Capital and has increased retained earnings by $50 million over the past 5 quarters. Only time will tell whether the growth will continue, and investors need to watch out for Munro taking on too much debt, but these positive catalysts during uncertain macroeconomic times make Munro Muffler an attractive opportunity.