During the Great Recession, auto parts stocks proved themselves to be a pretty decent countercyclical play, with many firms posting strong growth while the broader market was sinking in quicksand. And if the much-hailed recovery derails, this sector just might be poised for a repeat performance.
Why? Because consumers that bypass new car purchases and rail against skyrocketing used car prices still have to drive something. And that means band-aiding the old clunker in the driveway. And that’s a prime opportunity for stocks of the right auto parts companies. So, which stocks are best positioned to cash in on consumer angst and thrift? Here are three auto parts stocks to consider in this new age of frugality:
Advance Auto Parts
Advance Auto Parts (NYSE:AAP) on Wednesday reported second-quarter earnings rose 12% $113.1 million ($1.46 per share), up from $100.9 million ($1.16 per share) this time last year. With its commercial channel driving the gains, AAP’s second-quarter revenue increased by 4.48% to $1.48 billion. Analysts had expected profit of $1.38 per share on $1.5 billion in revenue.
One caution: same-store sales grew by only 2.5%, reflecting a smaller share of so called “do-it-yourself” customers. That’s one reason the stock hit a new 52-week low of $49.50 on Aug. 10. At $54.29, AAP recovered more than 8% on Thursday. With a market cap of $4.32 billion, the stock has a price/earnings-to-growth ratio of 0.92, meaning it is slightly undervalued. Debt position could be better: AAP has total cash of $53.67 million compared to total debt of $437.56 million. Good news: The stock boasts a return on equity of 34.74% and a dividend yield of 0.5%.
AutoZone
Citigroup analysts on Wednesday upgraded AutoZone (NYSE:AZO) stock from “Hold” to “Buy,” citing AZO’s potential upside. The company will release its fourth-quarter earnings later this month. AZO just hit a new 52-week high on July 11. At $281.89, the stock is trading nearly 39% above its 52-week low of $203.05 last August. With a market cap of $11.79 billion, AZO has a good PEG ratio of 0.94. The company has a negative return on equity and leverage challenges: $114.77 million in total cash compared to $3.22 billion in total debt.
O’Reilly Automotive
On July 26, O’Reilly Automotive (NASDAQ:ORLY) reported second-quarter earnings of $133.7 million (96 cents per share), an increase of 34% over the $99.6 million (71 cents per share) for the same quarter last year. Revenue grew 7.1% to $1.48 billion — and same-store sales increased by 4.4% as the company cashed in on the DIY market.
ORLY just hit a new 52-week high of $66.52 on July 1. At $59.02, the stock is trading more than 29% over its 52-week low of $45.74 last August. With a market cap of $8.05 billion, ORLY has a PEG ratio of 1, meaning it’s fairly valued. Return on equity is a solid 15.07%, and it has a better leverage position than its aforementioned peers do: $268.79 million in total cash compared to $498.55 million in total debt.
Bottom Line
Thanks to the recession, the average age of cars on the road is 10 years. And with consumers haunted by the specter of a double-dip recession, they are, to quote Mike Ditka, “throwing nickels around like they were manhole covers.” And that means investing in replacement parts rather than replacement cars.
In July, anxious consumers pared back spending on discretionary items and looked for rock-bottom deals on necessities. Sinking consumer confidence — reinforced by this week’s stock market convulsions — is a huge problem for sales of big-ticket items like cars, new or used. But auto parts stocks are well positioned to take advantage of these fears. For investors, auto parts stocks might be the silver lining to the economy’s gathering storm clouds.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
