Dividends and Growth from Fixing Cars
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
R.L. Polk auto marketing reported recently that Americans are holding on to their cars longer than ever. Reasons for this vary. Some believe the current economy makes it wise to put off buying a new car. Others point out that cars today are generally better made than in the past and thus last longer. Others claim new car loans typically now have longer terms. Regardless of reason, older cars need repairs and there are companies who cater to this market. Is there a specific company that does a superior job of generating profits from fixing a bucket of bolts?
Genuine Parts Company (NYSE: GPC) has long been the steady performer in the car parts business. This outfit operates NAPA Auto Parts warehouses and other distribution centers that supply thousands of retail outlets. GPC reports steadily improving earnings over the past two years and the stock price has increased accordingly. Standard and Poor's foresees further improvement of earnings as consolidation of the car parts business removes competition. A steadily increasing dividend for 56 years doesn't hurt, either. Currently, the dividend is about 3.1%. GPC has made five different acquisitions in the past two years that should further drive growth. Additionally, GPC has operations in Canada and Mexico, the latter contributing little to corporate earnings. All in all, GPC is the biggest company in a fragmented car parts market. Given its earnings and dividends history, it's a conservative play that may well be worth its high PEG and PE ratios.
LKQ Corp (NASDAQ: LKQ) is another high performance company with high PE and PEG ratios. Earnings per share from the most recent quarter are up 34% from the same quarter a year ago and earnings are projected to continue growing. The stock is up just over 66% for the past year. LKQ sells original manufacture, aftermarket and reconditioned parts for cars and trucks. While primarily operating in the US, the company has operations in Canada, Mexico and Great Britain. It recently acquired seven new businesses and opened 11 new locations in Great Britain. LKQ's most recent annual report indicates they plan on growing their business not only with a network of parts suppliers and acquisitions, but also by leveraging proprietary technology to secure the best possible prices, inventory control and sales. LKQ is roughly half the size of GPC by market cap, pays no dividend, and has a PE of 23 compared to GPC's PE of 16.
Advanced Auto Parts (NYSE: AAP) operates over 3600 retail stores, mostly in the US, and specializes in so-called after market parts (parts made by a company other than the original manufacturer of the vehicle). Its 2011 earnings growth was impressive: $5.11/share vs $3.95/share in 2010. More recent results have been disappointing with earnings off 12% from the prior year. AAP is comporably sized to LKQ by market cap but has a PE ratio of about 13. The stock price is off about 23% from its recent high secondary to disappointing results and reduced guidance issued in May 2012. The company plans to improve future earnings not only by focusing on its core DIY customers, but also expanding its base of commercial clients. AAP offers a dividend, but at 0.3%, it's not the reason you'd buy this stock.
The Pep Boys (NYSE: PBY) is another car parts retailer having a tough time of it. In May, the stock took a steep hit similar to that experienced by AAP. A buy-out by a private equity group fell through which did not help. Earnings have been disappointing for the past two quarters and the S&P has expressed concerns about PBY's "weak execution compared to peers." Specifically, PBY is planning a "hub and spoke" business model where smaller retail stores are centered around a large "supercenter" store. S&P believes this is a capital intensive business model. At a time when competitors, for example LKQ, are focusing on tight inventory control, this hub and spoke model may not be the best move. The current PE is around 27 and dividends appear to have been suspended.
For investment purposes, GPC looks like the safest long term bet. LKQ clearly has growth momentum but could experience a steep decline if earnings disappoint. AAP has dropped in price, but given recent earnings disappointments, I'd wait for evidence of improved profitability before jumping in. I would not touch PBY.
dylan588 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend LKQ. 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.If you have questions about this post or the Fool’s blog network, click here for information.