Automotive Part Retailers’ Strength: Are They Recession-Proof?
Seeking Alpha Analyst Since 2010
- Automotive part retailer stocks recent news.
- Grading automotive part retailer stocks with AAII’s A+ stock grades.
- What the A+ stock grades reveal.
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three automotive part retailers’ stocks that have generated positive returns in poor overall market conditions. For investors focused on opportunities in this industry, should you consider these three auto part retailer stocks of AutoZone Inc., Genuine Parts Co. and O’Reilly Automotive Inc.?
Automotive Part Retailer Stocks Recent News
Without a doubt, 2021 has been an interesting year in the market’s history, from supply chain and inflation issues to increased volatility and the coronavirus. However, one industry—the automotive parts industry—has thrived. These three stocks of interest—AutoZone, Genuine Parts and O’Reilly Automotive—dominate the industry’s market share, consistently gaining more from the small players thanks to the economies of scale they enjoy. Another major reason these stocks have had healthy returns lies with the state of the automotive industry. With new and used car prices increasing, consumers are keeping their vehicles on the road for much longer than before, creating an optimal environment for car part stocks.
According to the Auto Care Association, the U.S. automotive aftermarket was estimated to be a $297 billion industry in 2019 (latest available). The industry breakdown was $207 billion do-it-for-me (DIFM) customers, $58 billion do-it-yourself (DIY) customers and $32 billion tire sales. The industry is highly fragmented and driven by the following factors: the number and age of automotive vehicles in use; the number of miles driven per vehicle annually; the number of licensed drivers; the percentage of total light vehicle fleets represented by light duty vehicles, which generate higher average aftermarket product purchases versus purchases generated by cars; and the existence of $69 billion per year of unperformed and underperformed maintenance by U.S. vehicle owners, according to the Automotive Aftermarket Suppliers Association (AASA).
The coronavirus pandemic negatively impacted sales and perpetuated shortages, making 2021 a year for recovery across the industry. Sales volumes sharply recovered in China, Europe and the U.S. (which account for over 70% of global vehicle sales). While it is estimated U.S. light vehicle sales will rebound significantly, it is expected to fall below pre-pandemic levels. Sales would be stronger if not for the record low inventory levels and parts shortages that have plagued the market throughout 2021. In 2020, U.S. light vehicles posted a total of 14.45 million units, which is the weakest total seen since 2012. Semiconductor shortages as well as rising labor and raw materials costs are major concerns.
One major secular trend over the last several years has been the increasing popularity of light duty vehicles, a category encompassing pickup trucks, SUVs and crossovers. As previously mentioned, these vehicles generate higher average aftermarket product purchases versus passenger cars (such as sedans and compact vehicles), which have waned in popularity. Light duty vehicles accounted for 76.4% of total new vehicles sold in the U.S. in 2020, a percentage that was up from only 51.2% in 2010, according to the National Automobile Dealers Association.
On a positive note, rebounding gross domestic product (GDP), consumer stimulus, recovering unemployment and low interest rates should support sales volumes. Margins should benefit from record high price realizations and the significant cost cuts implemented in 2020.
Due to these factors, the automotive part retailers have benefited from strong repair and maintenance demand. The average U.S. vehicle age, easily one of the most important drivers, has reached a record high of 12.1 years, and trends are favoring the purchase of used vehicles versus new vehicles going forward. The reason this industry is sometimes denoted as “recession-proof” is because of the continuous strength with consumers that is unlikely to disappear regardless of market conditions.
Grading Automotive Part Retailer Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three auto part retailer stocks—AutoZone, Genuine Parts and O’Reilly Automotive—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Automotive Part Retailer Stocks
What the A+ Stock Grades Reveal
AutoZone Inc. (AZO) is the premier seller of aftermarket automotive parts, tools and accessories to DIY customers in the U.S. The company derives an increasing proportion of its sales from domestic commercial customers, although its presence in its home market is still dominated by its DIY operation, which accounts for nearly 75% of sales in country. AutoZone also has a growing presence in Mexico and Brazil. AutoZone had 6,767 stores in the U.S. (6,051), Mexico (664) and Brazil (52) as of the end of fiscal 2021. The company’s stores carry product lines for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. AutoZone also sells the ALLDATA brand diagnostic and repair software through AllData.com. Additionally, AutoZone sells automotive hard parts, maintenance items, accessories and non-automotive products through AutoZone.com and serves its commercial customers through AutoZonePro.com.
AutoZone has a Value Grade of B, based on its Value Score of 32, which is considered to be value. The company’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 43 for the price-to-free-cash-flow ratio, 4 for shareholder yield and 46 for the enterprise-value-to-EBITDA ratio (remember, the lower the score the better for value). Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-earnings, price-to-sales and price-to-book ratios.
AutoZone has a Momentum Grade of A, based on its Momentum Score of 86. This means that it ranks in the top tier of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters.
AutoZone has an average Growth Grade of C and does not currently pay a dividend.
Genuine Parts Co. (GPC) sells automotive parts (about two-thirds of net sales) and industrial components. The company operates through two segments: automotive parts and industrial parts. The automotive parts segment distributes replacement parts (other than body parts) for substantially all makes and models of automobiles, trucks and other vehicles. The company sells vehicle parts to commercial and retail customers through roughly 9,800 stores worldwide, most of which are independently owned, under the NAPA Auto Parts brand. Its industrial unit, primarily operating under the Motion Industries banner in the U.S., supplies bearings, power transmission, industrial automation, hydraulic and pneumatic components to maintenance, repair and original equipment manufacturer (OEM) clients.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Genuine Parts has a Quality Grade of A. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its F-score and buyback yield, ranking in the 95th and 86th percentile of all U.S.-listed stocks, respectively. However, it ranks poorly in terms of its change in total liabilities to assets, putting it in the 54th percentile.
Genuine Parts has a Momentum Grade of B based on its Momentum Score of 69, and a weak Growth Grade of D. The company has a current dividend yield of 2.5%.
O’Reilly Automotive Inc. (ORLY) is one of the largest sellers of aftermarket automotive parts, tools and accessories, serving professional and DIY customers (41% and 59% of 2020 sales, respectively). The company sells branded as well as own-label products, with the latter category comprising nearly half of sales. Its product line includes new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake system components, batteries, belts, hoses, temperature control, chassis parts, driveline parts and engine parts; maintenance items, such as oil, antifreeze, fluids, filters, wiper blades, lighting, engine additives and appearance products; and accessories, such as floor mats, seat covers and truck accessories. Its stores offer diverse services and programs to its customers, such as battery diagnostic testing; battery, wiper and bulb replacement; custom hydraulic hoses; drum and rotor resurfacing; electrical and module testing; a loaner tool program; and used oil, oil filter and battery recycling. O’Reilly Automotive had 5,616 stores as of the end of 2020, spread across 47 U.S. states, including 22 stores in Mexico. The firm serves professional and DIY customers through its store network and boasts approximately 765 sales personnel targeting commercial buyers.
O’Reilly Automotive has an A+ Growth Grade of C. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow. The company reported third-quarter revenues of $3.5 billion, up 8% from $3.2 billion in the year-ago quarter. O’Reilly Automotive reported quarterly diluted earnings per share of $8.07, increasing 14% year over year. The company reported an operating income of $755 million in the third quarter of 2021, growing $30 million from the prior-year quarter. O’Reilly Automotive does not currently pay a dividend.
Earnings estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. The company has an Earnings Estimate Revisions Grade of B, which is considered positive. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
The company reported a positive earnings surprise last quarter of 12.2%, and two quarters ago reported a positive earnings surprise of 10%. Over the last month, the consensus earnings estimate for the full year has increased from $29.18 to $29.37 per share based on 17 upward revisions. For the fourth quarter of 2021, the current I/B/E/S consensus earnings estimate of $7.30 per share has remained steady over the last three months.
O’Reilly Automotive has a Momentum Grade of B, based on its Momentum Score of 76, and an average Value Grade of C.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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