Auto Parts Are a Booming Business, And Here's How You Can Profit

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In the United States, an increasing number of consumers are keeping their cars on the road longer. It’s not entirely difficult to understand why. The economy is still struggling to recover from the worst financial crisis in decades. And, let’s face it: it’s not exactly a great feeling to purchase a new car only to see it lose thousands of dollars in value as soon as it’s driven off the lot.

As a result, car owners are turning to auto parts replacements rather than buying new cars as often as they used to.

If you’re a Foolish investor who’s always on the lookout for new opportunities, the boom in auto parts means big profits for these companies.

Two stocks for growth investors

For investors with an eye for above-average growth, then AutoZone (NYSE: AZO) and O’Reilly Automotive (NASDAQ: ORLY) should be in your cross-hairs.

Both stocks are retailers and distributors of replacement parts and accessories, and have seen their market values swell over the past couple years.

AutoZone has run from $350 per share to begin the year all the way to its current level of $440 per share, representing 25% gains in just seven months.

This isn’t a rally without merit. AutoZone has racked up profits in recent quarters, thanks to the booming industry it operates in. AutoZone reported 5% growth in net sales in its fiscal third quarter, along with 16% earnings per share growth.

Furthermore, over the first nine months of the year, the results have been just as impressive. Through the first three quarters, net sales and diluted EPS have grown by nearly 4% and 16%, respectively.

AutoZone doesn’t pay a dividend, so investors who value income above all else might feel left out in the cold. However, while AutoZone doesn’t return cash to shareholders in the form of dividends, it sure does in another form: share buybacks.

AutoZone spent $325 million on buying back 833,000 of its own shares in the third quarter. At quarter end, the company had $278 million remaining under its share repurchase authorization. Then, a few weeks later, the company announced a new $750 million share buyback plan.

This is how AutoZone has decided to return cash to shareholders, and it’s clear the company has done it well. Since the inception of the company’s repurchase program in 1998, AutoZone has authorized more than $13 billion in buybacks.

Meanwhile, O’Reilly Automotive is up a spectacular 37% just to begin 2013. The market was clearly pleased with the company’s recently released second-quarter results, which showed same-store sales growth of 6.5% and 37% diluted EPS growth, year over year.

This wasn’t a one-off quarter, either. Over the first six months of the year, sales and diluted EPS are up 7% and 28%, respectively, versus the first half of 2012.

The clear choice for income investors

For those investors who prefer the volatility-reducing nature of steady dividend payments, then Genuine Parts Company (NYSE: GPC) should be square in your headlights.

Genuine Parts might be an unknown name for many investors, but its NAPA distribution centers and auto parts stores should be much more familiar.

Genuine Parts began this year as a $65 stock but has run up to $80 per share, thanks to the strength of its underlying industry. Not only that, but over the past several years, Genuine Parts’ dividend has risen along with its profits and share price.

Genuine Parts quite simply has a track record of increasing dividends that is tough to match. Earlier this year, the company provided investors with a strong 9% increase in its quarterly dividend, which made this year the 57th in a row of increased dividends paid to shareholders.

Clearly, no company can maintain this kind of streak without the supporting underlying fundamentals, which Genuine Parts has.

Genuine Parts reported record sales and earnings in its fiscal second quarter, with sales growing 10% and EPS up 29% versus the same period one year ago.

This is how Genuine Parts is able to keep increasing its already solid dividend, which yields 2.6% at recent prices.

These stocks are firing on all cylinders

Each of these companies is capitalizing on the increasing trend of consumers fixing up their old cars to keep them on the road longer. The industry tailwinds are there for replacement auto parts: mainly, the struggling economy and the frustratingly high unemployment rate.

These stocks have rallied very strongly over the past couple years, and have provided returns well in excess of the broader market. No matter whether you’re a growth or income investor, there’s an auto parts stock for you.

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Robert Ciura 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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