Auto Parts Stocks: 2 to Drive, 2 to Ditch

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With strong growth in new vehicle sales, you’d think auto parts manufacturers would be wringing their collective hands over a shrinking Do-It-Yourself (DIY) or Do-It-For-Me (DIFM) market. In fact, a couple of emerging opportunities and challenges could be a boon for the right auto parts stocks.

carsFirst, the opportunity: Although market forecasts say new vehicle sales will hit 13.6 million in 2014, the average age of vehicles on the road is 11.4 years — the highest in history, according to Polk, the automotive research unit of IHS. With so many older vehicles still on the road, auto parts manufacturers have a clear opportunity to continue to profit from strong demand for automotive maintenance.

Second, the challenge: General Motors (GM) expects to spend $1.7 billion on parts, labor and loaner cars because of 13.8 million recalled vehicles in the U.S. And time is of the essence in the repair of 2.6 million vehicles with faulty ignition switches that have led to fatal crashes. As callous as it sounds, some auto parts manufacturers will be able to turn lemons into lemonade.

But not all auto parts stocks will benefit equally from the sector’s megatrends. Here are two auto parts stocks to drive now and two to ditch:

Ditch: U.S. Auto Parts Network (PRTS)

US Auto Parts PRTS 185Earlier this month, U.S. Auto Parts Network (PRTS), an online provider of automotive aftermarket parts, reported first quarter net sales of $68.0 million, 4% higher than the same quarter a year ago.

The company did swing to a slight $200,000 profit from a net loss of $3.3 million for the same quarter last year and has made progress in reducing its debt over the past year. Although the company is seeing growth opportunities in online sales — and the stock got a 6% bounce on Tuesday — PRTS is still a thinly traded microcap that has been significantly more volatile than the broader market in recent weeks.

Also, online channel growth misses out on much of the DIFM market, which has provided significant opportunity to rivals like Advance Auto Parts (AAP).

Drive: Delphi (DLPH)

Delphi Automotive DLPH 185Delphi Automotive (DLPH) could be a big winner from GM’s recall debacle. The company is running extra shifts at its manufacturing plant in Mexico to produce 2.6 million ignition switches to replace parts that could inadvertently slip out of the “run” position, shutting off airbags, antilock brakes and power steering.

Ironically, Delphi was GM’s sole supplier of the original ignition switch. But DLPH also has a strong future in emerging markets — particularly China, where the company says revenue will double to $5.5 billion by 2016.

DLPH stock is up 18% year-to-date, but it still looks attractively valued. It has a price-to-earnings-growth (PEG) ratio of 0.94 and a forward P/E of 12 — the nominal 1.4% current dividend yield sweetens the pot a little too, although DLPH is primarily a growth play.

Ditch: Pep Boys (PBY)

Pep Boys PBY 185Pep Boys (PBY) has been struggling with a variety of headwinds including stronger competition, lower earnings on tires and a class-action lawsuit in California alleging that PBY’s wage policies violate state labor laws.

When it last reported earnings in April, PBY reported a loss of 6 cents per share in the quarter — better than the 27 cents per share loss for the same quarter a year earlier — but revenue fell to $495.7 million, down from $530.8 million a year earlier. The company is likely to show continued pressure when it next reports earnings on June 10.

PBY has a PEG ratio of 1.65 and trades at nearly 18 times forward earnings — both indicators that the stock could be overvalued. The stock is down nearly 15% this year and could continue to slip if next month’s earnings disappoint.

Drive: AutoZone (AZO)

AutoZone NYSE:AZOOn Tuesday, AutoZone (AZO) reported third-quarter earnings of $8.46 per share and $2.34 billion in sales, beating the Street on the top and bottom lines. Nevertheless, AZO stock fell more than 3% on the news as investors fretted over inventory that was 12% higher — a sign that investors might be becoming blasé about AZO’s increase in earnings.

That said, there is a strong value proposition for AZO, beginning with strengthening parts demand in North America and Mexico, not to mention Brazil, where it opened its first four stores last year. AZO has a total of 5,279 stores and its same-store sales during the quarter rose by 4%.

AZO stock is trading around 15 times forward earnings and has a PEG ratio of 1.2, suggesting it could be slightly overvalued. Still, I see AZO as a growth play and am optimistic about its earnings growth trends. The stock, which rebounded on Wednesday after an upgrade from “hold” to “buy” from Gabelli, is up nearly 12% year to date.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/05/auto-parts-stocks-azo-pby/.

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