The auto retailers have benefited from a sluggish economy as drivers delayed purchasing new vehicles and instead put money into repairing their older models. Auto retailers have all of the parts and accessories that vehicle owners need to maintain their rides into looking and running as close to new as possible. With the economy growing slowly and the unemployment rate at 8.3%, the auto part retailers should continue to grow at an above average pace.
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Here are some highlights from each of the major auto part retailers:
Advanced Auto Parts (AAP) is a $6.45 billion mid-cap Virginia based auto retailer.
Pays a small dividend of 0.30%
Fairly valued with a forward PE ratio of 13.17, PEG of 1.01, price to book ratio of 7.54
Profit margin of 6.4% & operating margin of 10.79%
Q4 2011 revenue growth of 4.5%
Q4 2011 earnings growth of 38.1% Operating cash flow of $829 million & free cash flow of $518 million
Advanced Auto has exceeded its earnings estimates in three out of four quarters in 2011. It has 13 positive earnings revisions for 2012 and nine upward revisions for 2013. AAP grew earnings annually at a healthy 19.88% in the past five years and it is expected to grow at 14.96% annually for the next five years. This should take the current stock price of $88 up to $177 in five years for a total gain of 101%.
Auto Zone (AZO) is a $14.71 large-cap Memphis based auto retailer.
Does not currently pay dividends
Fairly valued with a forward PE ratio of 13.97 and a PEG ratio of 1.1
Profit margin of 10.62% and operating margin of 18.67%
Q2 2012 revenue growth of 8.6%
Q2 2012 earnings growth of 12.7%
Operating cash flow of $1.31 billion & free cash flow of $897 million
Auto Zone was able to exceed earnings estimates in its last four quarters. It has 19 positive earnings revisions for 2012 and 18 upward revisions for 2013. AZO grew earnings at a nice 23.37% annually in the last five years. It is expected to grow earnings at 14.76% for the next five years. If AZO is able to grow at this rate, the current stock price of $377 should hit $750 in five years for a 99% total gain.
Pep Boys (PBY) is a $786 million small-cap, Philadelphia-based auto retailer and repair shop.
Pays a dividend of 0.80% (offers a dividend reinvestment plan)
Undervalued with a price to book ratio of only 1.54
Profit margin of 2.05% & operating margin of 4.18%
Q3 2011 revenue growth of 5.2%
Q3 2011 earnings growth of 22.6%
Operating cash flow of $111 million & free cash flow of $64.4 million
Manny, Moe, and Jack exceeded earnings estimates in three of its last four reported quarters. It has grown earnings at an exceptional 46.34% annual pace for the last five years. However, the stock price is not currently reflecting this growth. The stock still has yet to recover to its pre-financial crisis levels of over $20 per share. Pep Boys is expected to grow earnings annually at 14% for the next five years. This should allow the current stock price of about $15 to rise to around $28 in five years for a total gain of 86% as a conservative estimate. However, since Pep Boys' stock has some catching up to do based on its earnings of the past five years, we could use a 10 year average growth rate based on the past five years plus the next five years. This would equal a 30.17% annual earnings growth rate which would take the stock price to around $42 in five years for a total gain of 180%.
O'Reilly Automotive (ORLY) is an $11.44 billion large-cap Springfield, MO based auto retailer.
- Currently does not pay dividends
Fairly valued with a forward PE ratio of 17.46, a PEG of 1.18, and a price to book ratio of 4.02
Profit margin of 8.77% and operating margin of 14.93%
Q4 2011 revenue growth of 6.2%
Q4 2011 earnings growth of 16.3%
Operating cash flow of $1.12 billion & free cash flow of $784.28 million
In addition to having a cool Irish name, O'Reilly Automotive has many good things going for it. It has met or exceeded its earnings estimates in each quarter of 2011. The company has an upward earnings revision for 2012 and 2013 which should lead to more positive earnings surprises. O'Reilly's annual expected earnings growth rate of 16.98% is the highest among the auto retailers. This growth rate should allow the current stock price of $89 to increase to approximately $195 in five years for a total gain of 119%.
Any of these companies should turn out to be solid investments for the long-term to tune-up your portfolio. The average age of vehicles has increased over the past few years due to lowered new car sales. This means that there are more cars on the road that have past their warranty period, which creates a good environment for the sales of auto parts. O'Reilly Automotive looks like the stand-out company as its expected earnings are the highest among the auto part retailers.
Additional disclosure: Although I don't own these stocks individually, I may have a position within a fund in my retirement plan.