Auto parts stocks often fly under the radar, getting little to no investor attention compared to their larger industry peers. While it’s the big-name car manufacturers that consistently grab headlines and investor focus, auto parts stocks have historically outperformed.
Unlike automotive manufacturers, whose sales often fluctuate due to the industry’s cyclical nature, auto parts distributors and retailers experience more stable sales. Even during economic downturns, when new car sales decline, there remains a consistent demand for auto parts. This is because people continue to maintain and repair their existing vehicles, rendering the sales of auto parts relatively recession-proof.
The following three stocks clearly display this quality, which has contributed to their consistent outperformance in the market over the years. This trend is poised to persist in today’s market, making these three names some of the best auto parts stocks to buy.
Genuine Parts (GPC)
Genuine Parts (NYSE:GPC) is one of these stocks that consistently receives great praise. The company has built an excellent reputation over the years, especially among income-oriented investors. This is due to its impressive dividend growth history, which few companies can match.
With an uninterrupted streak of 68 years of dividend increases, Genuine Parts is second only to American States Water (NYSE:AWR), which has increased its dividend for 69 years. This legendary track record, backed by consistent revenue and earnings growth over the years, illustrates the company’s ability to flourish even in tough market environments.
Today’s market has seen a noticeable uptick in average car prices, primarily attributed to parts shortages and constrained vehicle inventory. For this reason, demand for automotive components has been remarkably strong. Evidently, Genuine Parts achieved record sales of $23.1 billion last year. This trajectory appears poised to continue throughout the current year, as the company anticipates further sales growth ranging between 3% and 5%.
AutoZone (AZO)
AutoZone (NYSE:AZO) has consistently beaten the market over the decades. Take any 10-year period since the company IPO’d in 1991, and chances are that AutoZone has likely outperformed the general market indices. Due to its long and consistent outperformance, I became a shareholder in AutoZone a few years ago and couldn’t have been happier.
AutoZone’s outstanding outperformance can be attributed to management’s stellar execution of what is, surprisingly enough, a very simple business model. AutoZone’s strategy is incredibly straightforward: Open new stores, consistently grow and maximize same-store sales, and return all excess funds to shareholders through share repurchases. Over time, this simple, repetitive model has resulted in enormous compounding returns.
To illustrate, AutoZone has grown its sales every year since it went public 33 years ago. Additionally, since beginning its stock repurchase program in 1998, AutoZone has reduced its share count by an absurd 89%. With such a consistent revenue growth track record and focus on rewarding shareholders, it’s easy to extrapolate how the stock has managed to consistently outperform the market.
O’Reilly Automotive (ORLY)
O’Reilly Automotive (NYSE:ORLY) is AutoZone’s cousin. Their business models and approaches to growth and shareholder returns mirror each other. By executing the proven strategy I just mentioned, ORLY stock has achieved equally impressive, market-beating returns over the year.
Like AutoZone, O’Reilly has grown its sales every year since it went public in 1993. This is another example of how auto parts sales tend to remain highly resilient regardless of the underlying condition of the economy. And, again, like AutoZone, O’Reilly has repurchased and retired a not-as-impressive but still massive 58% of its outstanding shares. However, note that O’Reilly’s focus on repurchases began later, in 2011—hence the difference.
With the company’s financials set to benefit from the favorable dynamics of today’s auto parts market, I view O’Reilly as another one of the best stocks to buy in the space. This is why, besides holding AZO stock, I also recently bought some ORLY stock.
On the date of publication, Nikolaos Sismanis held long positions in AZO and ORLY. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
