It was a little more than five years ago that the economy started to sputter to life, just enough for new cars and trucks to begin selling again. Of course, used car sales were resurrecting as well.
The smart investors knew that if this trend continued that there would be that many more cars on the road that would need parts.
And they’ve been proven right.
The three big stocks in the auto parts sector are up 253%, 280% and 402% over the past five years. I don’t mention Pep Boys — Manny, Moe & Jack (NYSE:PBY) because its stock has gone nowhere.
No matter how brilliantly engineered a car is, it is going to need auto parts. In fact, the more brilliantly engineered it is, the more expensive those auto parts are likely going to be. Thus, as they say, “they get you coming and going” — no matter what kind of car you have, you are going to be paying for parts.
Auto parts are, in a way, the coffee of the transportation world. But is there any value left in the sector?
You bet there is. Let’s look at three and see which one is the best for you to bet on.
3 Auto Parts Stocks Racing Higher: O’Reilly Automotive Inc. (ORLY)
Market Cap: $21.5 billion
5-year growth: 402%
O’Reilly Automotive Inc. (NASDAQ:ORLY) has a huge domestic footprint, with 4,366 stores more than 42 states. It’s been in business since 1957, and it’s the 402% winner I mentioned.
The trick with auto parts stores is not to overexpand using debt when your cash flow cannot support the interest payments. ORLY has $251 million of cash on hand and $1.4 billion in debt, which accrues $53 million in interest. That’s a reasonable rate of about 4.5%.
ORLY’s free cash flow has been erratic but robust. Fiscal year 2012 saw $950 million, 2013 came in at $513 million and last year popped to $761 million. That’s more than enough to make the debt a non-issue.
Fiscal year 2015 earnings are expected to increase 16.5%, and 2016 is expected to add 13% to earnings per share. ORLY’s five-year estimates are a very impressive 15.6%.
The stock trades at $211, which is 25x earnings, giving it a five-year PEG ratio of 1.6. That’s expensive, although not unreasonably so for a growth stock.
3 Auto Parts Stocks Racing Higher: AutoZone, Inc. (AZO)
Market Cap: $21.1 billion
5-year growth: 280%
AutoZone Inc. (NYSE:AZO) is almost neck-and-neck with ORLY as far as footprint, with 4,984 stores in the U.S. and Puerto Rico. However, it also has a sizable Mexico presence with 402 stores. It’s been in business since 1959.
AZO has $117 million of cash on hand, but has a much higher debt load at $3.9 billion accruing $167 million in interest. That is equivalent to a rate of about 4%, also very reasonable.
AZO can support this higher debt load with its consistent and strong free cash flow, which was $845 million in 2012, $1 billion in 2013 and $903 million last year.
Earnings this year are expected to increase 13.7%, and 2016 earnings are expected to add another 12.2% to EPS.
AZO’s five-year estimates are for annualized growth of 13.2%. The stock trades at $660, which is 18.6 times earnings and giving it a five-year PEG ratio of 1.41. So AZO is slightly less expensive than ORLY.
3 Auto Parts Stocks Racing Higher: Advance Auto Parts, Inc. (AAP)
Market Cap: $10.9 billion
5-year growth: 253%
Finally, we have Advance Auto Parts, Inc. (NYSE:AAP) which is just a bit bigger still, with 5,261 stores, and serves another 1,325 independent stores. It’s been in business since 1929.
AAP has taken on debt over the past two years, increasing from $604 million to $1.6 billion. It has $195 million of cash on hand, and its debt accrues $73 million in interest, also at a rate of about 4.5%.
Free cash flow has also been erratic but strong, although not at the levels of its peers — $414 million in 2012, $350 million in 2013 and $480 million last year. That’s also plenty of cash flow to afford the debt.
Earnings this year are slated to rise only 10%, but 2016 is expected to add 19% to EPS. Five-year estimates are 13.5%. The stock trades at $151, which is 17.5 times earnings, giving it a price-to-earnings/growth ratio of 1.3.
So which of the three stocks is better?
I’m eliminating AAP since its free cash flow isn’t up to snuff. The other two are basically tied, but I’m going to go with AZO. It has one-third fewer employees yet generates almost 40% more revenue, and has higher margins across the board. It’s also 20% less expensive on a PEG basis.
As of this writing, Lawrence Meyers did not own shares in any of the aforementioned securities.
