As People Fix Up Clunkers, Fix Up Your Portfolio

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

The average age of vehicles in the U.S. increased from 10.8 years last year to around 11.3 years as of January 2013. As vehicles age more works needs to be done, providing excellent opportunities to the companies selling auto parts. I have analyzed the top three automotive parts retailers on the basis of their market capitalization in the U.S. Let's find out how investors will benefit by investing in these companies.

Improvement in same-store sale

Same-store sales help in evaluating the revenue growth from existing stores. Moderate weather conditions benefited AutoZone (NYSE: AZO) in the third quarter of 2013, and it posted same-store sales growth of 0.1%. However, consumer spending remained a challenge for the company. As the leading auto parts retailer in the U.S., AutoZone stands to profit from the increasing age of vehicles. Moreover, favorable weather conditions and improved consumer spending will aid same-store sales growth in the fourth quarter of 2013 to increase 3% quarter-over-quarter.

In the third quarter of 2013, the company opened 33 new stores in the U.S., and seven new stores were opened in Mexico. During the same time, AutoZone revenue increased to $2.21 billion, up by 4.5%, year-over-year. With the launch of new stores, sales of the company in its domestic commercial segment increased to $356.3 million in the third quarter of 2013, an increase of 9.7%, year-over-year. To foster continued growth, AutoZone will roll out 15 new stores in the Brazilian market by 2015. Also, in last nine months it rolled-out 84 new stores in the U.S. as well as 20 in Mexico. AutoZone now operates 4,767 stores in the U.S. and 341 stores in Mexico. With the ongoing expansion, it is expected that overall sales of the company will further increase to $9.58 billion next year rising from $8.06 billion in the previous year.

Rolling out expansion plans

O’Reilly Automotive (NASDAQ: ORLY) acquired VIP Parts at the end of last year for an undisclosed amount. VIP has 56 stores in the states of Massachusetts, Maine and New Hampshire. O’Reilly integrated VIP’s stores and opened 65 new stores in the first quarter of 2013. The company has an aggressive expansion plan in the U.S., and it will roll-out 190 new stores this fiscal year. With this expansion plan, it is expected that sales of the company will surge 7%, from $6.1 billion last year, to $6.64 billion in this year.

The company had a share buyback program which was announced in 2011, and the company went on to purchase 35.2 million shares by the first quarter of 2013. Last year, it increased share buyback authorization by $500 million, and in May 2013 O’Reilly added another $500 million. With this, the buyback program totals $3.5 billion. Out of total buyback, share worth of $800 million is still remaining. O’Reilly’s net income increased from fiscal year 2010 to last year on an average of around 18.5%. Also, it is estimated that the net income of the company this year will increase by around 10%, to $648 million, year over year which will support its share buyback program. This additional buyback will enhance the shareholders’ value.

Aggressive expansion plan

In the first quarter Advance Auto (NYSE: AAP) posted net income of $121.8 million, down by 8.8%, year-over-year. However, it was higher than the consensus estimate of $119.2 million in the first quarter of 2013. In the first quarter, its retail sales rose by 3%, to $2.05 billion, year-over-year. This sales increase was due to new stores, as it acquired BWP last year for around $180 million. The company rolled-out 56 new stores in the first quarter of 2013. Moreover, Advance Auto launched 163 new stores in last 12 months, and it will continue this expansion strategy in this year. With the BWP acquisition, Advance Auto increased the number of stores in the U.S. to 3,969. It is expected that, with the expansion of the business and adding new stores, it will achieve sales of $6.63 billion this year, up by around 7%, year-over-year.

Last year, the company announced its share buyback program of $500 million. However, the company repurchased shares worth only $59 million in the first quarter of 2013, and the majority of the total buyback is still remaining. However, it is estimated that the company will buy$300 million in shares in the third quarter of 2013. Net income of the company is expected to surge from $388 million last year to $405 million in this year, year-over-year. Growth in net income will support the share buyback program. The share buyback program will give upside to the stock price in the near future.

Conclusion:

AutoZone’s same-store sales are expected to increase in the next quarter, and its expansion plan will drive profits in the future. With the acquisition of VIP, O'Reilly will increase its footprint in the north-eastern states of the U.S. Moreover, the share buyback program will appreciate shareholders’ stock value. Advance Auto will gain benefits from its acquisition of BWP, through increased stores in the U.S. Additionally, the share buyback program of will boost confidence among investors.

All of these stocks are a buy.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Madhukar Dubey 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!

blog comments powered by Disqus