Advance Auto Parts, Inc. (AAP): The Best Company to Maintain Your Portfolio

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With the average age of vehicles being more than 10 years, car parts and car maintenance will become more and more necessary.  Even winter is expected to be comparably colder this year, which makes servicing your car all the more essential.  And that’s good news for car part retailers.

Thus, it’s no surprise that stocks of auto parts companies have enjoyed solid gains.  But the question is, which one do you think will stay ahead of this trend?

Advance Auto Parts, Inc. (NYSE:AAP)

Advance Auto Parts, Inc. (NYSE:AAPhas been a consistent performer, having increased revenue over 21% the past five years.  It’s also increased its operating margin from 8.1% in 2008 to 10.6% in 2012.  Although it operates more than 3,800 stores, its smaller than AutoZone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY), which operate over 5,000 and 4,000 stores, respectively.

Rapid expansion

A company needs to expand intelligently to strengthen its position in the industry. And Advance Auto Parts, Inc. (NYSE:AAP) seems to be doing just that, having opened 137 new stores in 2012 and acquiring 21 stores from  Strauss Auto Parts.  Recently, it opened 56 new stores and acquired 124 BWP stores, which should push its bottom line.

The BWP acquisition is expected to contribute $170 million in revenue this year.  In addition to  expansion activity, there is $434 million left in its stock buyback program.  Both of these conditions favor investors.

Another contender

Advance Auto Parts Inc (NYSE:AAP)O’Reilly Automotive Inc (NASDAQ:ORLY) has also been a strong performer having increased its revenue from $1.5 billion in 2003 to $6.2 billion in 2012.  At the same time it increased its EPS by more than 500% from $0.92 to $4.75. In 2012, its same-store sales growth was 3.8% while AutoZone, Inc. (NYSE:AZO) and Advance Auto Parts, Inc. (NYSE:AAP) were reporting negative growth. Having already opened 180 new stores last year, its now looking to open an additional 190 stores this year.  It also expects same store sales growth between 3% and 5%.

O’Reilly Automotive Inc (NASDAQ:ORLY) recently entered the New England market by acquiring Maine based VIP Parts Tires & Service.  This acquisition gave it 56 retail stores in Maine, New Hampshire, and Massachusetts. The 1300 stores acquired from CSK Auto in 2008 have also performed well and management expects CSK stores to reach $1.8 million per unit.

In the latest quarter, it posted a 19.3% increase in earnings to $1.36 per share (compared with $1.14 in the year-ago quarter), exceeding estimates by a penny. Revenue during the quarter scaled up 4% to $1.59 billion from $1.53 billion year over year. O’Reilly Automotive Inc (NASDAQ:ORLY)expects to continue its solid earnings and expects between $5.57 to $5.67 per share which blows away estimates.

Peer comparisons

AAP ORLY AZO
Operating Margin 10.17% 15.72% 19.25%
Forward P/E 13.73 16.83 13.40
PEG 5 Yrs 1.42 1.17 1.12
D/E Ratio 47.62 52.88 N/A
P/FCF 14.78 15.98 24
EV/EBITDA 7.55 11.33 9.69
ROA 9.05% 10.62% 16.40%
ROE 33.43% 23.97% N/A
Book Value Per Share 17.36 18.66 -43.2

All three companies expect the same earnings growth over the next 5 years.  But O’Reilly’s high P/E makes it an expensive choice considering that of its peers.  Likewise, O’Reilly Automotive Inc (NASDAQ:ORLY) is also expensive on EV/EBITDA basis.

AutoZone problems

AutoZone, Inc. (NYSE:AZO) has the best operating margin and return on assets which helps to explain why the company has been so successful and has the largest store base among the three companies. But it takes a hit when its debt and price to free cash flow is examined.

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