An Old Fleet
When consumers pulled back during the recession, one obvious casualty was new car sales. It’s hard to justify spending $30,000 or more on a new car if money is tight. This has left cars on the road a lot longer than usual, and resulted in what Mario Gabelli claims is the “highest percentage of off warranty vehicles in history.”
When cars go off warranty, car owners often look for the cheapest way to maintain them. That means more do-it-yourself work and more time at the local repair shop instead of at the car dealership’s service department. Both trends play into the long-term potential for aftermarket auto part retailers.
More than Parts
Genuine Parts Company (NYSE:GPC) is Gabelli’s pick. The company earns more than half of its revenue from its repair-shop focused NAPA auto parts division. It also has an industrial parts business (about a third of the top line) and smaller operations in the office supply and electrical distribution businesses. Clearly auto parts sales are a big determinant of the company’s success.
Despite the importance of the auto group, however, the company’s real skill is in getting things to where they need to be. So, while Genuine Parts Company (NYSE:GPC)’ four divisions may sound like an odd mix, they aren’t. And, the diversity provided by the four segments reduces industry specific risk. The diversification also allows the company to grow beyond an already large and competitive auto parts market.
The Numbers
The company’s top line dipped around 10% in 2009, then bounced back to pre-recession levels in 2010 and has been growing slowly and steadily ever since. Slow and steady growth is the norm here, with management still calling for 10% top line growth in 2013 despite a relatively weak first quarter. Earnings are expected to go from $4.14 a share last year to around $4.50.
As long as the auto fleet remains old, the company’s largest division should continue to push results higher. That should provide plenty of time for the other divisions to start contributing more. A long history of annual dividend increases and an around 2.5% yield are enticing, too. That said, the shares have had a nice run of late, so it might make sense to wait for a pullback.
Do-it-Yourselfers
AutoZone, Inc. (NYSE:AZO) is among the leaders in the do-it-yourself category. The company has over 5,000 stores, primarily in The United States (a few hundred are located in Mexico). In addition to the consumer arm, however, the company also has around 3,000 stores that cater to repair shops. So, like NAPA, it will benefit from professional repairs as well.
The relatively warm winter has been a drag on recent results since customers were able to perform work in the winter that they otherwise would have put off to the spring. That trend should even out over the balance of the year. Note, however, that AutoZone, Inc. (NYSE:AZO)’s top and bottom lines grew right through the recession, which is impressive.
The shares are at all time highs and it doesn’t pay a dividend. That makes the stock most appropriate for growth and momentum investors.
Improving Performance
Advance Auto Parts, Inc. (NYSE:AAP), another retail-focused company, also grew its top and bottom lines right through the recession. However, its profit margins are around eight percentage points lower than that of AutoZone, Inc. (NYSE:AZO).
The company has been working to fix this. Over the last few years its profit margin has improved from around 8% or so to about 10%. That’s a big improvement, but based on AutoZone, Inc. (NYSE:AZO)’s high teens profit margins, there could be more room to go.
Advance Auto Parts, Inc. (NYSE:AAP) has around 3,700 stores mostly located in the eastern half of the country. So it has plenty of expansion potential. Moreover, it has been moving into the professional side of the business using its existing store base. So top line growth shouldn’t be an issue. The aged auto fleet is just icing on the cake. The shares are still recovering from a swift drop in the middle of 2012, so it may still be a good investment option.
Tailwinds
The replacement auto parts business has a clear tailwind. That hasn’t gone unnoticed by the market, but that doesn’t mean the opportunity is gone. In fact, this is likely to be a trend that lasts for several years, since cars are relatively infrequently purchased items. Genuine Parts Company (NYSE:GPC) is the most diversified and conservative company here, while Advanced has something of a turnaround feel to it, as management works to increase profitability.
The article A Long Ride For Aftermarket Auto Parts? originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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