Auto-Parts Retailers Are Enticing Long-Term Holdings
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One sector I recommend for those seeking companies that are likely to thrive going forward, and also -- somewhat surprisingly -- have plenty of room for expansion is the auto-parts retail industry. Because of the various catalysts for growth that may impact these companies, they can potentially fare well under a range of environmental conditions, be it related to automobile sales or gasoline prices.
An overview of each major company might well serve to find the best industry participant for investment at this juncture.
Acquisition looks like a good move
One of the ways these companies are broadening their customer base is through the expansion into sales to commercial entities, i.e. professional mechanics. As these businesses currently serve only a very small percentage of that market, the growth potential is enormous.
That being said, Advance Auto Parts' (NYSE: AAP) Dec. 31, 2012 purchase of B.W.P. Distributors should enhance its growth prospects in the Northeast region and overall. B.W.P. distributes automotive aftermarket parts through the operation or supplying of 216 locations in the Northeastern U.S. I believe the buyout will support Advance's profitability in the region, where there is a higher population of drivers who are more likely to utilize service centers than perform repairs individually. In fact, the integration supported a 19% share net gain in the recent June quarter.
Advance is also achieving improvements in key metrics, such as gross margins and operating costs as a percentage of total sales. These measures are historically better than the industry as a whole.
In all, Advance seems to have an eye on the three- to five-year time frame, and it ought to be well situated for profit gains through that interim. The shares, trading at a P/E of about 13 on a forward basis, have long-term appeal.
Accelerating past its rivals
O'Reilly Automotive (NASDAQ: ORLY) is bucking sector trends, having seen a 6.5% gain in comparable-store sales in the June quarter. Plus, it is growing its store count at an approximate 5% annual rate, while also utilizing cash for accretive share repurchases. Share earnings soared 28% through the first six months of 2013.
Keeping with the commercial delivery theme, O'Reilly boasts a dual-market strategy (do-it-yourself (DIY) and professional customers). It too completed a small acquisition at the same time as Advance did, that of VIP Parts, Tires, & Service.
I like the company's strategies for growth, particularly that it already derives 41% of sales from the commercial market. It appears to be putting cash to good use, as well. Investors have, accordingly, bid up the shares to new heights of late and their forward P/E is 18.6. Nevertheless, the long-term price appreciation potential is healthy for this stock.
Industry leader keeping pace
AutoZone (NYSE: AZO) is the largest sector participant and thus an indicator of market trends. It has historically grown same-store sales under most operating climates, expanded the store count at a more-than-4% annual pace while maintaining an internal-rate-of-return hurdle on new locations, and repurchased large amounts of shares.
The result has been consistent and substantial share-net gains.
Moreover, AutoZone is aggressively building its commercial operation, currently available at nearly 70% of units. As the profitability of this service improves by way of better productivity and increased in-stock positions, AutoZone's margins, already above industry norms, should gain momentum.
AutoZone shares offer long-term capital appreciation potential from their forward P/E of 13.8. For more see "This Auto-Parts Retailer Will Keep Your Returns in High Gear."
Supercenter operator gaining ground
Finally, there is Pep Boys - Manny, Moe, & Jack (NYSE: PBY). The company's Supercenters and Service & Tire Centers average about 20,000 square feet and are located across 35 states.
The company is seeing a bounce back in profits, thanks to comparable-store gains, particularly stemming from the services business. This is where Pep Boys differentiates itself from the pure retailers. Its do-it-for-me format, combined with DIY, allows for increased market share, possibly at a greater rate than its competitors.
In fact, as newly opened centers ramp up to company-average sales numbers, Pep Boys has the potential to grow profits faster than the sector average. The sizable earnings rebound on tap for this year may be a harbinger of things to come. Pep Boys shares are trading at a P/E of 18.8 on a forward basis, reflecting the company's recovery stage at present.
The choices among auto-parts retailers are as follows: for a pure growth play, look to O'Reilly or Advance, where you should find earnings growth and company expansion. AutoZone should remain an industry powerhouse, especially once its commercial-delivery business is fully rolled out and at desired productivity levels. Lastly, as Pep Boys tests its more customer-centric prototype, its sales ought to improve, and this strategy may be a basis for long-term growth.
Overall, industry sales may fluctuate on vehicle wear and tear, thus being affected by gasoline prices and the number of older autos on the road. That said, I look for the momentum of this sectors to be largely positive in subsequent years.
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Damon Churchwell has no position in any stocks mentioned. The Motley Fool owns shares of O'Reilly Automotive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!