These Stocks Might Continue to Defy Gravity This Year

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

Confidence in the economy, tax refunds, and low-cost financing are some of the reasons that have driven car sales higher so far this year. According to USA Today, income tax refunds have helped consumers make the down payments for new cars and replace older vehicles that have been on the road for around 11 years.

However, stocks of companies that sell aftermarket auto parts have done well this year, despite the rise in the number of new vehicles. Advance Auto Parts (NYSE: AAP), AutoZone (NYSE: AZO), and O'Reilly Automotive (NASDAQ: ORLY) have appreciated in the mid-teens, even though the first two reported negative same-store sale growth in their latest quarterly reports.

Let’s review how each of them did in the first three months of 2013 and what can be expected from them going forward.

Advance Auto Parts

Advance Auto added just over 15% to investors’ wealth in the first quarter of the calendar year, which included a positive quarterly report. Even though the company failed to improve revenue, and witnessed a 1.9% decline in same-store sales in the previous quarter, efficient cost management helped it record a solid bottom line beat.

Going forward, Advance Auto is looking to step on the gas and catch up with its larger peers. The company is behind AutoZone and O’Reilly in terms of store count, but it is aggressively looking to grow its network. It opened a record 137 stores in the previous fiscal year, and acquired stores of the bankrupt Strauss Auto Parts to establish its presence in New York.

The company is also intent on growing its e-commerce business, and is counting upon the older population of vehicles to drive its business. It expects its new stores, a colder weather, declining gas prices, and a rise in the population of vehicles older than seven years to help its same-store sales back in the black.

The stock trades at a trailing P/E multiple of 15.6, which doesn’t seem too expensive considering the moves it is making. Investors should keep an eye on Advance Auto as it has the potential to advance higher as the year progresses.

AutoZone

AutoZone appreciated about 14% in the first three months of the calendar year, but reported mixed results for the second quarter. The company, like Advance Auto, witnessed a decline in same-store sales which fell 1.8%, as a delay in processing income tax returns held up tax refunds and hurt AutoZone. However, AutoZone did manage to grow earnings 15% from the year-ago period on the back of lower cost of parts.

Being the largest auto-parts retailer in the U.S., AutoZone enjoys the advantage of having the widest network of stores, which number just above 5,000. The company is facing weakness in the Northeast and the Midwest markets, while analysts expect that AutoZone’s do-it-yourself business, which forms the majority of its revenue, is in for some tough times due to spending constraints of low income households.

However, management is optimistic about the company’s progress going forward. The high average age of vehicles, expectation of a colder winter later this year, and focus on e-commerce are expected to drive results. Investors seem to have confidence in AutoZone’s prospects as well, since the stock has continued its rally even after the mixed results it posted in late February.

AutoZone’s trailing P/E ratio of around 16 is almost at par with Advance Auto, but its PEG ratio of under unity is the lowest among the peer group, which signifies that it’s expected to grow the fastest. The company might be under pressure as of now, but the probability of an upswing in the business going forward might help the stock keep its momentum intact. However, with the stock trading near its 52-week high and no immediate bounce back in same-store sale growth in sight, investors should tread with caution while considering AutoZone for their portfolio.

O'Reilly Automotive

O’Reilly was the only one among this group which managed to buck the trend of negative same-store sale growth. The market duly rewarded the stock by sending it up more than 16% in the previous quarter, which is the best of the lot.

The company’s revenue grew 7% in its last-reported fourth-quarter, while an earnings jump of 20% was again the pick of the lot. While O’Reilly also had to contend with headwinds identical to its peers, it singled out its terrific customer service as the reason behind growth.

O’Reilly expects to continue its solid performance going forward, as evident from its earnings expectation of $5.57-$5.67 per share in fiscal 2013, ahead of the consensus estimate of $5.44 a share. O’Reilly is counting on an increase in average miles driven, a colder weather, and growth in its professional and do-it-yourself businesses to further improve its same-store sales.

The company is aggressively building more stores in an effort to catch up with AutoZone. O’Reilly opened 180 stores in the previous fiscal, and is looking at opening 190 in the current fiscal. It has also made a couple of acquisitions to grow its business further.

However, with a trailing P/E ratio of almost 22, O’Reilly is the most expensive of the lot. But, a forward P/E of 16 times suggests that the market is expecting further growth. It would be unwise to discard O’Reilly because of its expensive valuation, since the company has been growing at the fastest rate among peers and is in the green zone as far as same-store sale growth is concerned.

The takeaway

Rising sales of new vehicles haven’t deterred auto-parts retailers from expecting a good year. While there might be headwinds in the short term, the business of these companies is built to last as consumers will go to them for replacement parts as time goes on. A high average vehicle age, coupled with around 50 million cars that are 16 years or older, should help these companies keep their revenue stream intact.

As far as picking the right stock among them is concerned, Advance Auto and O’Reilly look the most attractive ones. Advance Auto’s continuous efforts to bring its same-store sale growth back into the green and O’Reilly’s solid across the board improvement make them the go-to stocks in aftermarket retail.


Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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