The Best Company to Maintain Your Portfolio

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

With the average age of vehicles being more than 10 years, car parts and car maintenance will become more and more necessary.  Even winter is expected to be comparably colder this year, which makes servicing your car all the more essential.  And that's good news for car part retailers.

Thus, it’s no surprise that stocks of auto parts companies have enjoyed solid gains.  But the question is, which one do you think will stay ahead of this trend?

Advanced Auto Parts (NYSE: AAP) has been a consistent performer, having increased revenue over 21% the past five years.  It's also increased its operating margin from 8.1% in 2008 to 10.6% in 2012.  Although it operates more than 3,800 stores, its smaller than AutoZone (NYSE: AZO) and O’Reilly Automotive (NASDAQ: ORLY), which operate over 5,000 and 4,000 stores, respectively.

Rapid expansion

A company needs to expand intelligently to strengthen its position in the industry. And Advanced Auto Parts seems to be doing just that, having opened 137 new stores in 2012 and acquiring 21 stores from  Strauss Auto Parts.  Recently, it opened 56 new stores and acquired 124 BWP stores, which should push its bottom line.

The BWP acquisition is expected to contribute $170 million in revenue this year.  In addition to  expansion activity, there is $434 million left in its stock buyback program.  Both of these conditions favor investors.

Another contender

O’Reilly Automotive has also been a strong performer having increased its revenue from $1.5 billion in 2003 to $6.2 billion in 2012.  At the same time it increased its EPS by more than 500% from $0.92 to $4.75. In 2012, its same-store sales growth was 3.8% while AutoZone and Advanced Auto Parts were reporting negative growth. Having already opened 180 new stores last year, its now looking to open an additional 190 stores this year.  It also expects same store sales growth between 3% and 5%.

O'Reilly recently entered the New England market by acquiring Maine based VIP Parts Tires & Service.  This acquisition gave it 56 retail stores in Maine, New Hampshire, and Massachusetts. The 1300 stores acquired from CSK Auto in 2008 have also performed well and management expects CSK stores to reach $1.8 million per unit.

In the latest quarter, it posted a 19.3% increase in earnings to $1.36 per share (compared with $1.14 in the year-ago quarter), exceeding estimates by a penny. Revenue during the quarter scaled up 4% to $1.59 billion from $1.53 billion year over year. O’Reilly expects to continue its solid earnings and expects between $5.57 to $5.67 per share which blows away estimates.

Peer comparisons

 

AAP

ORLY

AZO

       

Operating Margin

10.17%

15.72%

19.25%

Forward P/E

13.73

16.83

13.40

PEG 5 Yrs

1.42

1.17

1.12

D/E Ratio

47.62

52.88

N/A

 P/FCF

14.78

15.98

24

EV/EBITDA

7.55

11.33

9.69

ROA

9.05%

10.62%

16.40%

ROE

33.43%

23.97%

N/A

Book Value Per Share

17.36

18.66

-43.2

All three companies expect the same earnings growth over the next 5 years.  But O’Reilly’s high P/E makes it an expensive choice considering that of its peers.  Likewise, O’Reilly is also expensive on EV/EBITDA basis.

AutoZone problems

AutoZone has the best operating margin and return on assets which helps to explain why the company has been so successful and has the largest store base among the three companies. But it takes a hit when its debt and price to free cash flow is examined.

AutoZone has total debt of $4 billion versus just $133.68 million in cash. And that really reduces its book value per share.  Obviously, this is a big problem.  If things start to go against the industry, AutoZone may have trouble covering its debt load.  This is a big issue when considering a stock for investing.

Foolish takeaway

Both Advanced Auto Parts and O’Reilly Automotive boast strong financials while AutoZone has a pile of debt to deal with.  On the surface, Advanced Auto Parts appears to be cheaper than O'Reilly Automotive, despite its higher operating margin and larger store base.  

Ultimately, Advanced Auto Parts seems a better bet as its cheaper and its growth prospects are in line with that of O’Reilly.  As the automobile industry continues to rebound, so too should businesses that operate in the auto part industry. So perhaps you should take a look at Advanced Auto Parts, of the three, its the best in class.

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harsha lohia 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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