(AM) The Auto Aftermarket in a Decade of Disruption

Since the first Model T rolled off Ford’s assembly line in 1908, few consumer products have enabled as much economic growth as the automobile. In more recent years, few industries have seen as much disruption. Between tariffs, self-driving vehicles, consumer confidence, gas prices, EVs, and robotaxis, there is no shortage of noise and controversy in the automotive space.

In the United States, approximately 16 million new cars are sold each year by manufacturers like Ford, GM, and Tesla.¹ These companies are supported by a web of suppliers and dealerships, many of which are publicly traded. At VELA, a core part of our investment discipline is to own only those companies where we can reasonably estimate a range of economic outcomes. Further, we will only buy a company at a discount to what we believe it is worth based on those estimations. This has typically disqualified many companies in the new vehicle space, whose earnings power can change seemingly overnight due to regulations, foreign subsidies, and economic cycles. Instead, we focus on those companies serving the 300 million vehicles already owned in the US,²often referred to as the “automotive aftermarket.” Given the far larger market size and relatively slow rate of vehicle replacement, the aftermarket tends to feature better predictability and competitive dynamics. And, notably, companies in the aftermarket tend to be subject to the same narrative-driven stock market dislocations as new car manufacturers—even when the underlying business fundamentals may be far less impacted. As valuation-centric investors, these short-term dislocations are often where we find opportunity.

The electric vehicle (EV) craze of 2021-2022 is one example. During this period, sales of EVs were growing rapidly, stimulated by the growth of Tesla and new federal environmental regulations requiring most new cars to be EVs by 2035 (vs. ~7% in 2022).³ To meet these regulations, auto manufacturers and their suppliers had to make huge spending commitments despite poor returns and uncertain consumer demand. EV startups like Rivian received multi-billion-dollar valuations despite little-to-no revenue. To give a sense of investors’ appetite for EV stocks: Rivian’s market cap reached a peak of $153 billion a week after their IPO, more than each of GM, Ford, and Volkswagen, despite having delivered fewer than 200 vehicles.⁴ Predictably, the demand for EV stocks left many gas-engine focused companies out of favor.

We took advantage of this environment to invest in Valvoline Inc (VVV). Best known for its stay-in-your-car oil change, VVV was, in our estimation, a highly predictable growth company with 15-straight years of same-store sales growth. However, the fears of an EV-dominated world spooked investors, as VVV’s business relies on servicing internal combustion (gas-powered) engines. We decided to crunch some numbers. Given the aftermarket is 20x the size of the new car channel with an average vehicle age of 13 years, we found that big swings in new car EV sales barely moved the aftermarket vehicle population. In fact, every percentage point increase in EV penetration in the new car channel is just a 0.05% increase in penetration in the overall vehicle population. Even with optimistic EV sales assumptions, we forecasted that gas-powered cars would remain the dominant vehicle type for 15+ years. With just 5% share of oil changes, VVV could see significant growth during that time frame due to their strong business model and underpenetrated store base. Four years later, EV sales have faltered and VVV reported its 19^th consecutive year of same-store sales growth.⁵

Once we understood how to model changes in the US vehicle population, we began to look for other misunderstood aftermarket companies. This began our foray into the gasoline retail industry, where companies like Casey’s General Stores and Murphy USA participate. In 2022, these businesses were written off as volatile, undifferentiated, and existentially threatened in an EV-dominated world. When we looked closer, we saw that these retailers served small town Middle America, where EV penetration was lower than average. This meant that their runway was potentially longer than Valvoline’s. We also found these businesses weren’t as volatile as they appeared. While revenue fluctuated due to gas prices, profitability was highly stable. Both companies have grown earnings consistently since 2013.⁶

When inspecting the drivers of this profitability, we found a common advantage that many aftermarket companies share: local competition. For both MUSA and CASY, competition is limited to a small radius, as opposed to manufacturers like Ford that face global competition. This small radius of competition is comprised of mostly small players: gas station chains of 10 stores or fewer comprise ~63% of the industry⁷ (contrary to popular belief, oil companies rarely own gas stations). Every year, the small operators lose gallons to the larger, better-run chains. To maintain profitability amidst declining volumes, the small shops must raise their profit per gallon. Thus, each year MUSA and CASY sell more gallons with higher profits-per-gallon, which is the key driver behind their steady profit growth. While the EV scare prompted our entry into this industry, we see these tailwinds continuing as inefficient operators continue to dominate the landscape. We invested in MUSA in late 2025 with retail gas prices approaching the lowest level since early 2021. Investors no longer saw the benefit of MUSA’s scale and low consumer prices, which we thought were underappreciated. With gas prices now eclipsing $4 per gallon, investors are once again appreciating that MUSA is uniquely positioned to lower costs for consumers.

While the EV bubble has largely played out, autonomous vehicles (AVs) and robotaxis are the most recent auto industry disruptions we think are creating opportunities. One perceived loser is Copart Inc. (CPRT), which operates the largest US marketplace for totaled vehicles. Connecting sellers (primarily insurance companies) with buyers of totaled cars requires a liquid, global marketplace, thousands of acres of land, and logistics infrastructure for processing and storing vehicles. As a result of these barriers to entry, the industry has settled into a natural, high-margin duopoly.

However, the industry requires drivers who get into accidents. Ambitious robotaxi proponents envision an AV-dominated world with minimal collisions. Indeed, self-driving vehicles from Tesla and Waymo crash less often than their human-operated counterparts (albeit in more controlled conditions). How do we assess the long-term prospects of CPRT in light of this technology? Accident frequency has been declining throughout CPRT’s existence due to improving in-car technology (i.e. automatic emergency braking, lane assistance, and heads-up displays). Yet, it has managed to grow revenue by 203x since its 1994 IPO and 3.8x since 2016.⁸ Counter-intuitively, accident-avoidance technology has been a huge tailwind. While these systems lower the rate of accidents, they have dramatically increased the cost of repairing the ones that occur. Insurers, which compare the cost of repairing a vehicle to the proceeds they’d get at a salvage auction, are increasingly totaling more accidents, from 8% of accidents in the 1990s to 23% in 2025.⁹ Technology is also making cars older. The average new car price exceeds $50,000 versus ~$37,000 in¹⁰ 2019. Consumers today are more likely to hold onto their current vehicles or shift their purchases to the used car market. Older cars are much more likely to be totaled: total loss rates exceed 30% for vehicles 10+ years old and 45% for 13+-year-old cars, nearly double the average rate. The average vehicle is 13 years old today versus 11.6 years in 2016,¹¹ and more vehicles are likely to fall in the 10+-year-old bucket as we look at continued inflationary pressures in new car pricing.

What does all this mean for the future of CPRT? We believe vehicles will predictably become older and more complex, providing continued tailwinds to auction volumes and revenue-per-car. Autonomous vehicles could actually accelerate these trends as these “supercomputers-on-wheels” will be extremely expensive to repair. Tesla is an early example—its cars are commonly found available on CPRT’s auctions due to sky-high repair costs and auction values. Conversely, if AVs prove to be a net headwind, the impact likely won’t be felt for a long time. We feel it’s safe to assume the adoption of fully autonomous vehicles will be slow, potentially slower than EVs due to regulatory and psychological barriers. Thus, the AV impact could range from a net headwind emerging in 15+ years to a net tailwind, similar to past technologies. As a result, we felt comfortable with the range of outcomes for CPRT. In our view, the investment is a classic aftermarket setup: a high-quality, predictable business on sale due to short-term new car dynamics.

Despite our preference for owning aftermarket businesses, we will invest in the new car channel when we identify an opportunity that meets our investment criteria. However, we demand a much greater margin of safety to offset a slightly wider range of possible outcomes. One example is Proficient Auto Logistics (PAL). Through long-term contracts with auto manufacturers, PAL manages transportation of ~2 million new cars to dealerships, of which two-thirds are sub-contracted to third-party carriers (asset light), and one-third are transported via company-owned equipment.¹² PAL partners with nearly every auto manufacturer and transports EVs and non-EVs alike, providing improved visibility compared to other companies in the new car channel. We believe its industry is at a cyclical inflection point after years of weak margins and consolidation. However, PAL is more cyclical than our aftermarket businesses, for which we demand a much greater discount to intrinsic value. PAL operates at a double-digit free cash flow yield despite operating at a low point in its profitability cycle. It just purchased its second-largest competitor, another step in the ongoing industry consolidation.¹³ We believe these factors created a favorable risk-reward to justify our investment.

In summary, we have found the automotive industry to be a fertile source of ideas. The industry offers a diverse range of businesses, many of which are high quality and frequently on sale. While our investments have generally fallen into the aftermarket channel, our process remains the same regardless of industry: we are looking for companies with strong balance sheets, predictable cash flow, and experienced management teams. And importantly, we always seek a robust margin of safety for our clients. We will continue to take advantage of noise in the automotive space as we seek to find attractive long-term holdings.

Disclosures:

VELA Investment Management, LLC is a registered investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about VELA Investment Management, LLC, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, and/or Form CRS, which is available upon request.

Information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

The views expressed are those of VELA Investment Management, LLC as of 09/11/2026 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Third-party information in this report has been obtained from sources believed to be accurate; however, VELA makes no guarantee as to the accuracy or completeness of the information.

As of the most recent month end period, the following holdings (noted in this piece) were held in one or more VELA Investment Management strategies: VVV, MUSA, CPRT, PAL. As of the same period, CASY was not held in any VELA strategies. The companies identified above are example holdings and subject to change without notice. The companies above have been selected to help illustrate VELA’s investment process. This information should not be considered a recommendation to purchase or sell any particular security.

Capex (Capital Expenditure) is money a company spends to buy, maintain, or improve its long-term physical assets, like buildings, equipment, technology, or land, to increase future economic benefits, rather than for daily operations.

Earnings Per Share (EPS) is a company’s net income divided by its number of outstanding shares. It is a commonly used measure of profitability on a per-share basis and is often used to compare earnings power across companies or over time.

Free Cash Flow (FCF) is the cash a company generates after covering its operating expenses and capital expenditures (Capex). It represents the discretionary cash available for reinvestment, debt repayment, dividends, or acquisitions without affecting day-to-day operations.

Intrinsic Value represents the true, inherent worth of an asset, investment, or company based on its fundamental, underlying factors—such as cash flows, revenue, or assets—rather than its current, fluctuating market price. It serves as an objective, calculated estimate of long-term value used by investors to identify undervalued or overvalued securities.

Margin of Safety is the difference between a company’s estimated intrinsic value and its current market price. Investors who buy at a discount to intrinsic value build in a margin of safety intended to cushion against errors in judgment or unforeseen negative events.

Same-Store Sales (SSS), also called comparable-store or comp sales, measures the change in revenue generated by locations that have been open for a comparable period (typically at least one year), excluding the effect of newly opened or closed locations. It is commonly used to gauge organic growth in retail and franchise businesses.

^1,2 Source: S&P Global Mobility
³ Source: U.S. EPA
⁴ Source: MarketWatch
⁵ Source: Valvoline Inc. fiscal 2025 10k filing
⁶ Source: NACS State of the Industry Report, as cited in public SEC filings
⁷ Source: Factset
⁸ Source: Factset
⁹ Source: CCC Intelligent Solutions’ Crash Course 2026 report
¹⁰ Source: Kelley Blue Book
¹¹ Source: S&P Global Mobility
¹² Source: Factset
¹³ Source: Proficient Auto Logistics 8-K and press release, August 2026