Auto Parts Retailers: Wait For A Pullback Before Hitting The Gas

 |  Includes: AAP, AZO, ORLY, PBY
by: Bill Maurer

This week, auto parts retailer Autozone (NYSE:AZO) released its quarterly and full year earnings report. The numbers were very good. The company beat on both the top and bottom line for the quarter and full year. The company's CEO was excited:

"Our fourth quarter performance was a strong conclusion to a record breaking year for AutoZone. At the beginning of the year, we challenged the organization to build on the robust performance we had experienced over the last two years. Our AutoZoners, through their passion, dedication and never ending commitment to meet or exceed our customers' expectations, delivered. For fiscal 2011, we delivered 30% growth in earnings per share. We also achieved several all-time company records; exceeded $8 billion in sales, surpassed $1 billion in commercial sales, grew fiscal year EBIT margin to 18.5% and exceeded 30% return on invested capital ending the year at 31.3%. This financial success is a direct result of the tremendous contributions of our more than 60,000 dedicated AutoZoners, and I would like to congratulate them on this exceptional performance," said Bill Rhodes, Chairman, President and Chief Executive Officer.

That got me thinking-- if Autozone is having a record year, is it time to buy? And what about its competitors. Let's take a look at the company compared to Advanced Auto Parts (NYSE:AAP), O'Reilly (NASDAQ:ORLY), and Pep Boys (NYSE:PBY). This might be a good industry to get into right now. With the uncertain economy, there are a lot of people that will definitely hold off on buying a new car for now, and instead put money into the cars they have now. This will be beneficial for the industry in the short term. I'll throw some tables out there, and then analyze afterwards.

Current Price $328.15 $60.99 $70.77 $9.81
52-week high $333.99 $72.32 $72.00 $15.96
52-week low $214.00 $49.50 $51.71 $8.18
Market Cap. $13.64B $4.63B $9.62B $517M
Dividend Yield None 0.40% None 1.20%
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P/E 18.07 14.02 22.00 12.92
Forward P/E 14.79 11.64 17.30 10.55
Price/Sales 1.73 0.77 1.71 0.26
Price/Book N/A 6.13 3.04 1.02
PEG (5-year) 1.16 1.09 1.20 0.99
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Revs (2010) $7.36B $5.93B $5.40B $1.99B
Revs (2011 est.) $8.07B $6.16B $5.78B $2.05B
Revs (2012 est.) $8.45B $6.46B $6.19B $2.17B
EPS (2010) $14.97 $3.95 $3.05 $0.66
EPS (2011 est.) $19.47 $4.68 $3.61 $0.74
EPS (2012 est.) $22.16 $5.23 $4.09 $0.93
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*Autozone's fiscal year ends in August. Numbers for 2011 are actual. Pep Boys' fiscal year ends in January. All others follow calendar year end.

Gross Margin 51.03% 50.03% 48.56% 29.89%
Operating Margin 18.52% 10.02% 14.07% 4.41%
Net Margin 10.52% 5.92% 8.19% 2.01%
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Current Ratio 0.81 1.12 1.75 1.32
Debt Ratio 121.38% 78.79% 41.23% 68.06%
Working Capital ($638.5M) $256.1M $1.10B $179.7M
Cash $97.6M $68.8M $268.8M $62.0M
Short Term Debt $34.1M $991K $1.01M $1.08M
Long Term Debt $3.32B $565M $498M $295M
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Let's look at Autozone first. It is the leader of the industry, posting the largest revenues and net income, thus fetching the highest market cap. It's currently trading near its 52-week high, so if you are thinking of entering, you may want to wait for a pullback. The valuations are a little higher than the industry, but some might be comfortable paying a little extra for the industry leader. Autozone has decent growth potential and the highest margins in the industry. The company could use a little work on its balance sheet, however. The company has more liabilities than assets, and a fair amount of long-term debt. I'd especially like to see that current ratio improve over the next few quarters. I'm not worried yet, but if these numbers get a little worse, I may start to question the company's long-term viability. For now though, this is a good company, leading its industry, with a slightly inflated share price. This company seems like a decent buy, but I'll reiterate my point that you might want to wait for a pullback. $315 would be a decent entry point if you can get it.

O'Reilly is second in the industry by market cap. It trails Autzone for second in revenues, but its higher margins allow it to have the second highest net income of the four. Like Autozone, the stock is near a 52 week high and trades a little pricey for the industry. However, the company has solid margins and is expecting a fair amount of growth this year and next. It does have the strongest balance sheet of the four, and I'm a big fan of strong balance sheets. With its strong financial position, I wouldn't be surprised if the company tries to take on some more liabilities in an effort to build up the company in the coming years. It has the flexibility and strength to do so. All in all, this is a solid company, but like Autozone, probably worth waiting for a pullback before jumping in.

Advanced Auto Parts is next. This company has the second highest revenues of the group, but slightly below average margins give it third place in market cap. Valuation wise, the company is fairly priced, at a decent discount to its larger peers. It also pays a small dividend and is not trading at its 52-week high. Margins are fairly good, and the balance sheet is okay-- not the best, but it's not as bad as Autozone's. This company is solid, but it's not the flashiest out there. It doesn't excite me, but that doesn't mean it isn't a good investment.

The last one I'll focus on is Pep Boys, since it is the smallest. The stock offers the lowest valuation in the group, and offers a 1.2% dividend yield. Margins are well below those of its peers, and sales and earnings growth will lag in the future as well. A few parts of the balance sheet look healthier than the rest of the industry, but the company does have the highest long term debt to market cap of these four. It's not the best in the industry, so I won't recommend it right now.

The auto parts industry may continue to be a beneficiary of the weak economy, and these are the names to look at if you are curious. While they aren't growing at tremendous rates, they still offer mid single digit revenue growth and quite a bit of EPS growth. I'd like to see some better balance sheets, but these stocks have been on a tear lately, so these companies must be doing alright. Autozone did just announce a record year. If I had to recommend them in order, I would go ORLY, AZO, AAP, PBY. However, I would wait for a pullback. ORLY is up 19% since the end of July, while AZO is up 15%, and AAP is up 11%. PBY is down 9%, which is close to the S&P's decline of 10% over that time. Now might not be the best time to get in, but it's the perfect time to take a look and start doing your own research. That way, when the perfect opportunity comes to get in, you'll be ready to make your move.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.