Despite the federal governments “Cash for Clunkers” program in 2009, which may have put 690,000 new vehicles on the road, plenty of Americans have cars that need fixing up from time to time. And during the recession and slow-growth current economy, lots of those car owners have done their own repairs whenever possible. That’s been a big boost to the business of auto parts retailers, such as AutoZone (NYSE:AZO) and Advance Auto Parts (NYSE:AAP). They’re the two biggest players in the industry, with a 19.6% market share and 14.9% share, respectively.
The latest earnings reports from AutoZone, which posted its quarterly results Tuesday morning, and Advance Auto Parts, which reported last month, bear that out. But which of these two market leaders make a better investment at this point?
First, let’s consider the industry’s growth rate. It turns out that the auto parts industry is growing at about the same rate as the general economy — rising at a 2.6% annual rate since 2006 to $41.9 billion in 2011, and generating a 7.2% profit margin on $3 billion in net income, according to IBISWorld.
However, that growth is expected to slow to 1.3% through 2016. That’s because if the economy recovers, more people are likely to pay mechanics to fix their cars, leaving the auto parts sellers to be sustained by demand from commercial vehicle owners.
Analysts were expecting AutoZone to report rapid revenue and earnings per share growth, with sales forecast to grow 5.5% to $1.89 billion, and EPS to rise 18% to $4.45 a share. But Auto Zone sped through those expectations, reporting a 7.3% revenue increase to $1.92 billion and EPS that spiked 24% to $4.68. Underlying this performance was a 4.6% boost in same-store sales and some new store openings — 17 in the U.S. and two in Mexico.
This brought AutoZone’s total store count to 4,832 — including 4,551 in the U.S. and 281 stores in Mexico. Profit was also aided by lower distribution costs and a drop in so-called shrinkage — i.e., employee stealing.
This isn’t the first strong quarterly report from AutoZone. In its fourth quarter, AutoZone net income rose 12.1%, in the third quarter it was up 12.1% again, and in the second quarter it rose 20%, according to Narrative Science.
Advance also did well, but its revenues aren’t growing as fast as AutoZone’s. In its third-quarter report released Nov. 9, Advance showed a 4% increase in sales to $1.46 billion (meeting expectations) on adjusted EPS of $1.41 a share — which was a whopping 23 cents ahead of Thomson Reuters I/B/E/S forecasts. That growth was aided by “higher same-store sales and new store openings,” according to Reuters.
So here’s what the investment choice between AutoZone and Advance boils down to:
- AutoZone: fast growing, fat margins; slightly expensive stock. AutoZone’s sales have risen 9.6% in the past 12 months to $8.1 billion, while its net income rose 15% to $849 million — yielding an industry-leading 10.5% net margin. Its price/earnings-to-growth ratio (where a PEG of 1.0 is considered fairly priced) of 1.18 is a bit pricey on a P/E of 17.4 and expected earnings growth of 14.7% to $25.87 in its fiscal year 2013.
- Advance: fast growing, fair margins; somewhat pricey stock. Advance’s sales have increased 9.5% in the past 12 months to $6.1 billion, while net income has increased 28% to $375 million — yielding an industry-lagging 6.2% net margin. Its PEG of 1.14 is slightly overvalued on a P/E of 14.7 and expected earnings growth of 12.9% to $5.61 in 2012.
AutoZone is the winner in this auto parts face-off. It’s growing and has market-beating margins, thanks to its ability to meet cost reduction targets. And given its track record of beating earnings growth targets, its stock should benefit from future upside surprises.
Peter Cohan has no financial interest in the securities mentioned.