Can These Auto Parts Retailers Continue Their Run?

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

Auto parts retailers have seen a good run up since the last recession. In the last five years, O'Reilly Automotive (NASDAQ: ORLY), Advance Auto Parts (NYSE: AAP) and AutoZone (NYSE: AZO) have given returns of 335%, 85% and 210% respectively; in the process, they have significantly outperformed the S&P 500’s 34.68% return.

These companies have been able to post this outstanding performance thanks to their market share gains against smaller mom-and-pop stores. These gains were driven by the companies' superior services and strong financial positions.

In this article, I am taking a look at these companies from an investment perspective. We'll see if it makes sense to buy them after the big run up they have already seen in their stock prices.

This company looks for growth through its online sales and hub strategy

AutoZone’s stock price has increased by approximately 20% in the last six months. In the third quarter of the 2013 fiscal year it has achieved sales growth of 4.5%, despite a 0.1% decline in domestic same store sales. Its sales growth can be attributed to its stores growth, commercial programs and online sales. It has focused on differentiating itself by providing great service to its customers with specialized staff. It has opened 102 commercial programs in the third quarter, which will increase commercial sales and productivity.

E-commerce is another growth driver for the company. It has acquired AutoAnything recently and it will look to achieve sales growth with both the AutoZone.com and AutoAnything.com websites. The online channel has helped it to cover a larger consumer customer base and to provide more convenience to its commercial customers.

AutoZone's hub strategy provides it with the advantage of quick replenishments for local stores. It has opened two more hub locations in the third quarter, bringing the number of hubs to 154. It has also remodeled the hub locations, enabling them to better maintain inventories for retail and commercial customers.

The company currently trades at a forward price-to-earnings ratio of 14.30, lower than the 18.98 forward ratio of its peer O'Reilly Automotive. I recommend “buy.”

New distribution centers and a focus on large national accounts will drive growth

Advance Auto Parts has focused on two key strategies: superior availability and service leadership. Under its superior availability strategy, it has focused on store growth, increasing its presence in commercial business and improving its supply chain. The company's Remington distribution center is its key step to improving its replenishment service and distribution facilities. It will still distribute products and services to only 400 stores and replenish only 200 stores, however.

Advance's increase in commercial credit from very low to a high of 40% will help it to attract more customers. The company will also look to benefit from another daily distribution center in Connecticut and the modernization of existing facilities.

The company has taken several initiatives to drive sales growth in its Do-It-For-Me and Do-It-Yourself segments while reducing costs. It has also focused on large national accounts with a sales activation program, increasing these accounts by high-single digits in the first quarter of the 2013 fiscal year. Advance's improved labor productivity and more flexible cost structure have also helped improve its bottom line.

Advance Auto Parts has reported earnings per share of $1.65, beating consensus estimates. It is trading at a forward price-to-earnings ratio of 13.61, the lowest among its peers. It is cheap and is a good “buy” for long-term growth.

Growth momentum with geographical expansion and online sales growth

O’Reilly Automotive has reported better-than-estimated quarterly results amid improving weather conditions and industry trends. Its earnings per share of $1.58 for the second quarter of the 2013 fiscal year showed a 37.6% increase and remained above consensus estimates of $1.50. Its gross margin expanded by 94 basis points, aided by reduced costs from acquisitions and a better product mix; negotiating better prices from suppliers also aided the cost reductions.

Both the Do-It-Yourself and professional segments have seen steady growth in the last quarter and will drive sales growth into the future. O'Reilly's redesigned its "First Call Online" business-to-business platform, including more products and additional features. A chain-wide rollout of the loyalty program will also drive sales growth.

The company has plans to expand its presence in the northeast region of the US, where it is underrepresented. Its Lakeland, FL distribution center and stores expansion plans in Florida will help it to achieve sustainable growth in the long term as well.

O'Reilly's has repurchased shares, with an average of 12% in the past five quarters. This has boosted its earnings per share, and the company is expected to continue its repurchase plans in the future. It trades at relatively high forward price-to-earnings ratio of 18.98 as compared to its peers, but it has a bright growth outlook. As a result, I recommend a “buy” for it.

 Conclusion

Auto Zone is trying to differentiate itself with better in-store services and commercial programs. Its online channel and hub strategy are expected to drive sales growth. Advance Auto Parts looks to grow using its superior availability and service leadership strategies, focusing on large national accounts to drive its sales growth. O’Reilly Automotive plans to use regional expansion and the opening of new distribution centers to achieve economies of scale. Its online channel and loyalty program will help it to attract broader customer base. All three of these companies are solid buys.

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Ash Sharma 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!

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