Shares of auto parts retailers have been on a tear the past couple of years because consumers unable or unwilling to pony up big bucks for a brand new ride have settled for fixing up the jalopy already in the garage. But even though new car sales are experiencing a recovery-fueled revival, there’s still upside potential in the automotive aftermarket sector – just don’t expect the meteoric growth we’ve seen in the past.
There’s no doubt about it, there’s still plenty of money to be made in the auto parts business. Despite the recent rebound in new car and truck sales, the average age of a vehicle on the road today is more than a decade – with a full two-thirds of those vehicles more than seven years old. And cars of a certain age are sure to need more frequent service and a broad array of replacement parts.
The rebound in new vehicle sales is unlikely to shift the auto parts market into reverse any time soon. Still, the sector faces potential headwinds such as rising fuel prices and bad weather, which had an impact on sales this winter. Although the fundamentals for auto parts firms will remain strong through 2011, this is also a sector that has soared since 2008, so don’t expect the same monster growth to continue this year – unless the economy takes a step back.
That being said, here are five stocks with strong fundamentals in the auto parts space that could be a smart buy – if you’re content to live with a little less flash and a little more protection from economic uncertainty:
O’Reilly Automotive (NASDAQ:ORLY) came in above analysts’ estimates on Wednesday as the company reported fourth-quarter earnings after the market closed. Sales increased 12% and earnings rose 47%. The company has solid fundamentals, having posted strong monthly same-store sales growth throughout 2010. The stock is trading 55% above its 52-week low and closed up 58 cents on Wednesday to $58.28.
Penske Automotive (NYSE:PAG), which also released its fourth quarter results on Wednesday, announced that net income was up 53%, largely on U.S. sales. The company saw its same-store service and parts sales rise by 7% last year. Investors have found a lot to like about Penske — its share price has jumped more than 93% from its 52-week low.
Advance Auto Parts (NYSE:AAP) last week reported a 40% spike in its fourth quarter 2010 net income last week. The shares have risen 65% from their 52-week low and closed up 88 cents Wednesday to $64.41.
Pep Boys (NYSE:PBY) has gained a lot of investor attention since tapping Bank of America (NYSE:BAC) to help it vet potential buyers. Talk that the company is on the block has provided an added boost to share prices since the news broke last month. That said, Pep Boys’ stock might be slightly overvalued based on an earnings yield of less than 4%. The shop that Manny, Moe and Jack built has seen its share price rise nearly 82% over its 52-week low.
AutoZone (NYSE:AZO), which announces third-quarter earnings on March 1, looks like a relatively low-risk play, even though some analysts consider it to be overvalued. Although share price has lost some ground recently, the stock is still up more than 65% over its 52-week low.
