3 Stocks to Take Advantage of an Auto Rebound

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

As the unemployment rate decreases and consumer sentiment increases, the auto market is improving.  Now, not only are manufacturers benefiting from this dynamic, but auto parts companies are also experiencing growth. Take a look at these 3 auto-related businesses--you might like what you see.

Get in the zone

AutoZone (NYSE: AZO) is an efficient operator among the specialized auto parts retailers. The company trades with a P/E around 16, well below the industry’s average. It also has operating  (19.3%) and net (11%) margins, higher than industry average.  Its revenue has increased by 4% to $2.2 billion in the last quarter and its bottom line rose by 6% to $266 million. Lastly, its cash from operations increased 9% to $896 million, and its free cash flow increased 11% to $637 million.

As you can see, strong demand for autos should propel AutoZone's stock higher. Its nationwide presence is huge and customers generally end up in its stores to buy auto parts. It also caters to independent mechanics, which appeals to customers who want to fix it themselves.  Its in-house lending tool program is geared towards gaining these customer's loyalty.

AutoZone has also expanded its share repurchase program as it has a strong cash position. Its free cash flow has increased every year since 2008, and that's not likely to change.  Overall, AutoZone is good buy in this space.

O’Reilly Automotive (NASDAQ: ORLY) acquired CSK Auto in 2008, which helped it become one of the top auto part retailers in the country.  Although it specializes in the "do it for me" market (DIFM), improvement in the auto industry should propel the stock to higher levels.

The company trades with a P/E of 22.5, which is above the industry’s average.  But it deserves that price as its balance sheet carriers a lower debt to equity ratio than industry average.  Its sales in the last quarter increased 3% to $1.58 billion. Its net income also increased by 4% to $154 million, or $1.36 per share.

O’Reilly Automotive should continue to perform well in the future. Its gross margin and operating margin have been improving over the last 10 years.  Additionally, it has approved an increment of $500 million to its already established share repurchase program.  Its free cash flow has declined over the past year, but it still should be enough to cover any capital needs.

It also sports a positive same store sales increase and it expects a healthy 3% to 5% growth in same store sales for this year. Further it's rapidly expanding and the penetration in the Northeast region of the country is solid. Overall, O’Reilly Automotive should continue to perform well in the future.

Lastly

Advance Auto Parts (NYSE: AAP) is a major retailer of auto parts operating in the United States. It trades with a P/E ratio around 16.2, well below the industry average. Although its revenues increased 2% to $2.0 billion, in the latest quarter, its net income decreased by 9% to $122 million. Its cash from operations declined from $235 million to $135 million, and its free cash flow declined from $153 million to $72 million.  These reductions in operating performance were due to some short term weaknesses that should be fixed in the coming quarters.

On the positive side, Advance Auto Parts is strengthening its e-commerce business and improving its commercial business. Its balance sheet carries the least amount of debt from the three companies discussed here, as it has a debt to equity ratio of 0.49.

It operates 3,700 stores mostly located on the east coast of the United States, so there is potential for expansion. Lastly, it's improving its profit margin, and although it is lower than AutoZone’s, the 8% improvement over the last few years is nothing to sneeze at.

The foolish conclusion

If you're looking at the auto industry, AutoZone, O’Reilly Automotive, and Advance Auto Parts should be considered . All 3 offer interesting valuations and still have room for growth.  As the auto business continues to rebound, aftermarket auto parts should also do well.  These downstream plays may be perfect for those who wish to avoid the big automotive manufactures.

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Robinson Roacho 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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