2 Companies With Huge Growth And Low Volatility
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wait a minute, huge growth and low volatility? I didn't think these two things could go together. Most investors assume that for a company to exhibit good earnings growth they have to be prepared for a wild ride. When it comes to volatility the most common measure is a company's beta. In simplest terms, a company's beta is just the relationship between how a company's stock moves relative to how a stock market index moves. Companies with lower betas won't move as much, and usually these companies are limited to stocks that fit into the more slow growing industries. Using the Fool.com CAPS Screener I came across both AutoZone (NYSE: AZO) and O'Reilly Automotive (NASDAQ: ORLY) that fit this criteria.
Many people know AutoZone either from personal shopping experience or from their “Get In The Zone, AutoZone” commercials. The company operates over 4,600 auto replacement stores across the nation. While auto parts companies might not seem that exciting, the company's growth has been consistent over the last few years. This actually shouldn't be surprising since the Great Recession is still causing individuals and families to hold onto their vehicles longer. As everyone knows, the longer you have a vehicle, the greater the chance you will need AutoZone. This growth out of necessity has served AutoZone well in the last few years as net income and operating cash flow have both increased at a better than 29% rate overall. The company has also outperformed analysts expectations in each of the last four quarters.
AutoZone's management has also shown a willingness to return cash to shareholders in the form of share repurchases. In fact, the company has repurchased over $1 billion in shares each of the last three years. Analysts generally expect better than 16% earnings growth over the next few years as well. Even with all of this good news, the stock sells for just under 14 times forward estimates, and has a beta of less than 0.50. While the stock doesn't pay a dividend, you get low volatility, 16% projected growth, and the shares sell for a discount to their growth rate. Sounds like this company really is “in the Zone.”
Not surprisingly O'Reilly Automotive also operates in the replacement auto parts industry. The company is slightly smaller than AutoZone with about 3,800 stores, but the same positive factors helping AutoZone have also lifted O'Reilly over the last few years. The market is slightly more aware of O'Reilly's positive results with the stock selling for about 18 times forward earnings versus under 14 at AutoZone. However, O'Reilly seems to deserve this higher valuation as the company's increase in net income and cash flow in the last three years has been truly impressive. Net income has increased by a total of 65.1% in the last three years, while operating cash flow jumped by 292.35%.
The company has been slightly less bullish on its stock compared to AutoZone, and actually issued shares in two of the last three years. However, last year management stepped up to the plate in a big way, repurchasing over $900 million in shares. O'Reilly also has been consistently outperforming analysts with four earnings beats over the last four quarters. Analysts are calling for almost 17% earnings growth going forward, and the company's positive momentum seems to indicate they will at least meet this goal. Unfortunately for yield seeking investors, O'Reilly also doesn't pay a dividend. However, with a low beta of less than 0.50 and near 17% earnings growth expected, investors should add this stock to their Watchlist as well.
As you can see, the auto parts business has been good and analysts are calling for impressive growth going forward as well. Since neither of the above companies pays a dividend, I wanted to also give income-hungry investors an option as well. This leads us to Genuine Parts Co. (NYSE: GPC). Genuine Parts is the company behind the famous NAPA auto parts name. The company isn't expected to grow quite as fast as AutoZone or O'Reilly's, but does pay a dividend yield of about 3.2%. The company sells for a P/E ratio of about 15, and also carries a less than volatile beta of 0.74. The company's payout ratio is 53%, which means their dividend should be a safe bet.
Whether you want income or faster growth, the auto parts industry has a lot going for it. Even if the economy continues to improve, it's a safe bet that customers will continue to try and fix their old cars rather than forking over the money for a new one. The Great Recession has taught a lot of people to be more careful with their money, and this is one industry that will benefit from this new frugality for years to come.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.