Will 2013 Be Another Good Year for Auto Retailers?

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The hardline retail industry had a great 2012. However, investors aren’t sure if 2013 will bring the same gains as last year. It is interesting to note that the retail industry is said to move in tandem with the economy. However, it was a surprise for investors that despite a challenging macro environment in 2012, the retail sector saw big gains. In order to form some judgment on the 2013 outlook for retail players, I have picked three companies belonging to retail-autoparts:

Advance Auto Parts (NYSE: AAP): Although AAP screens relatively attractively on valuation and has easy comparables, the Street believes 2013 EPS growth will be subdued due to investments. The investments being made are sound strategic moves in our view, but in a tepid top-line environment, they could have a negative impact on the P&L. These investments include building out new DCs and Superhubs, expanding inventory selection, adding more labor hours in stores, and being more price-competitive. While all of the aforementioned should put AAP on a better path to narrow the EBIT margin gap with its peers, the interim may be choppy. Credit Suisse has set a target price of $75 (which was previously $65).

AutoZone (NYSE: AZO): AutoZone’s risk/reward profile seems attractive, despite the recent top-line slowdown. Expectations have come in as a result of the recent soft patch and comparisons are relatively easy. The Street expects steady growth through new units and commercial programs. The market widely believes that the gross margin levers are also under-appreciated given private label penetration and direct sourcing. AutoZone has also demonstrated agility on the expense line, allowing the company significant flex when needed. Ultimately the company is viewed as set up for mid-teens growth next year with a predictable buyback adding to EPS. Against lower expectations and a valuation that has already come in, this makes for a decent setup in 2013.

O’Reilly Automotive (NASDAQ: ORLY): O’Reilly is one of the most preferred DIY (Do-it-yourself) Auto investments for 2013. Although its valuation is segment leading, I believe that it is justified, given the company’s ability to grow faster than its peers combined with its accelerating free cash flow and buyback. Productivity improvements at CSK Autos (CSK Autos was acquired by O’Reilly back in 2008) remain a meaningful driver and retail and commercial comps from the CSK regions are expected to pace the company’s top-line gains in 2013.

O’Reilly is intensifying its focus on the DIY side of its business as the company is upgrading its diagnostic tools to give more information to DIY customers. The system can identify problems beyond the check engine light and help pinpoint the exact problem with one’s vehicle. The company’s greater focus on DIY is timely, as it senses that DIY market share may be up for grabs. The internal changes and the new focus should lead O’Reilly to put up the best comps in the sector for the foreseeable future, leaving it as the best positioned name in the space. Credit Suisse believes that O’Reilly is likely to exceed estimates camp by 5%.

Foolish Bottom Line

Though, the outlook for 2013 doesn’t seem as bright as 2012, but still I feel auto retailers are in for another good year. 


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