Auto Parts Suppliers: Valuation Check Shows O'Reilly Is Attractive

AutoZone Inc. (AZO), the largest U.S. auto parts retail chain, reported better-than-expected earnings on Tuesday. Shares of rival auto parts dealers Advanced Auto Parts Inc. (AAP) and O'Reilly Automotive Inc. (ORLY) also rose on the news. The higher stock prices sent us looking for value stocks in this arena, and O'Reilly Auto to land on the Reuters Select value stock screen for Favored Value Plays.

AutoZone has been trading at a relatively attractive valuation, on the basis of key metrics such as price to earnings (P/E) and P/Sales. In fact, out of these three auto parts dealers, O'Reilly seemed the most expensive, as indicated below.

Even though O'Reilly's valuation ratio prices the company at a premium to AutoZone and Advanced Auto Parts, it is still priced at a discount to the average for the specialty retail industry. Thus far, all three companies satisfy the first requirement of the Favored Value Plays screen: a company must have P/E and P/Sales ratios that are at or below the industry norm.

These comparisons are based on passed performance. But stocks are at least theoretically valued on expectations of future performance. For this reason, the screen also takes into consideration analyst estimates. It goes past simply comparing forward P/E ratios - current price divided by the consensus of analyst EPS estimates for this year and 2007 - and it focuses on the PEG ratio - forward P/E divided by long-term EPS growth rate. Generally, more-conservative value-oriented investors prefer to focus on companies with PEG ratios below 1.00, but readings even a bit north of this threshold are still in value territory. The screen filters for companies that have PEG ratios that are less than 2.00.

As indicated below, O'Reilly has a much higher forward P/E, based on expectations of 2007 EPS. But, analysts believe that it can also grow its earnings at a superior rate over the long term, giving O'Reilly a marginally lower PEG ratio.

The screen also requires that analysts have been upping their EPS estimates recently. This is where O'Reilly took the lead. A month ago, the consensus for AutoZone's 2007 EPS stood at $8.23, which is where it stood prior to this morning's earnings release. At Advanced Auto Parts, the consensus reading has fallen from $2.51 one month back, to the current mean estimate of $2.50. By comparison, the consensus 2007 EPS estimate for O'Reilly was $1.85 a month ago, but now stands at $1.87.

Analyst optimism about O'Reilly is also reflected in the average rating. This is a key part of the "favored" portion of the Favored Value Plays screen. Using an index that ranges from a buy recommendation receiving a score of 1.00 to a sell recommendation warranting a score of 5.00, the screen requires that a company have an average rating of less than 2.00.

Further, we want to identify stocks where analyst sentiment is at least holding steady at a relatively positive level, the screen requires that the current average rating must be less than or equal to its reading four weeks back. The consensus reading for O'Reilly has improved from 1.88 one month ago to 1.79 at present, thus securing its position on the Favored Value Plays screen.

At the time of publication, Erik Dellith did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.