That’s great news for car-parts suppliers, which have been buoyed as the average age of cars rose last year to a record 11.4 years, according to Edmunds.
There’s plenty of pent-up demand for new cars, after so many people put off purchases during the recession and weak economic recovery, but the parts business looks to remain hot for quite some time.
“There is still a need for auto parts, not just retail but supply to dealers and mom-and-pop stores,” according to Scott Edgar, the founder and chief investment officer of Edgar Investment Management in Danville, Ca. His firm uses a proprietary screening process to select equity investments for clients, focusing on what he calls “stable growth companies.” It’s a long-term approach, and Edgar believes that short-term stock performance isn’t important when holding quality stocks.
Edgar holds several retail stocks in client portfolios, and in a phone interview said he is “favorable to a lot of the retail names despite the fact that the outlook has gotten a bit more pessimistic after the first-quarter earnings releases.”
“Nevertheless, the market has overreacted to the first-quarter earnings announcements,” Edgar said. This is a phenomenon we explored this week in 12 bargain-bin stocks to buy low and sell high.
Edgar said that, when selecting stocks for client accounts, he looks “at companies’ historic trends and if the earnings they report are still in line with those trends and the numbers looking forward still look good, I don’t worry about what the rest of the market thinks. I am still happy owning them.”
Here are four stocks of companies in the car-parts supply business listed by Edgar, sorted with the cheapest stock relative to its consensus forward earnings estimate:
All four of the stocks have at least tripled over the past five years, which is much more impressive than the 129% total return for the broader S&P 500 Index. All four also have shown strong growth in sales per share for each of the past five calendar years.
Three of the four names have had double-digit returns this year, compared with a return of 5% for the index and the 6% decline for the S&P 500 Retailing subsector, according to FactSet. Here’s a brief discussion on each.
Edgar’s favorite company on the list is AutoZone Inc.
which is the largest in its industry by market value. The stock is up 10% this year through Thursday’s close at $529.10. AutoZone is headquartered in Memphis, Tenn, and has 4,900 stores in the U.S., 374 in Mexico and four in Brazil.
The company is still expanding, with 30 stores opened during its fiscal third quarter ended May 10. Fiscal third-quarter earnings increased 7% to $285.2 million, while earnings per share were up 16% to $8.46. EPS grew much faster because the average share count declined 8% from a year earlier, as the company’s share buybacks totaled $1.47 billion over the preceding 12 months.
Edgar said the stock is a “core holding” for his clients, and that it is “one where the Street expectations are almost perfectly in line with the historic trend.” That may not sound very exciting but it means that sell-side analysts consistently raise their earnings estimates as the company grows its earnings. That has a tendency to drive share prices higher over time.
The stock has returned 243% over the past five years, which is second-best among the names mentioned here.
The combination of continued revenue and earnings growth, with share buybacks leading to significantly higher EPS growth, is indeed attractive. And the company is “continuing to advance their technology to make the customer experience better,” according to Edgar
Advance Auto Parts
Advance Auto Parts Inc.
of Roanoke, Va., operates 5,276 stores under its own name, 105 Worldpac branches that distribute parts to independent repair shops, and also serves 1,400 Carquest stores that are independently owned. The company acquired the Carquest and Worldpac businesses when it bought the privately held General Parts International for about $2 billion.
The stock has returned 210% over the past five years.,
For the fiscal first quarter ended April 19, comparable-store sales were up 2.4%, while total adjusted sales rose 35.5% to $2.97 billion, mainly from the acquisition of General Parts International. Net income increased 21% to $147.7 million, while EPS rose 22% to $2.01. The average share count declined 1%, as stock buybacks outweighed stock issuance for employee compensation.
Edgar does not hold any shares of Advance Auto Parts in client accounts.
of Chicago has a business model that sharply differs from the other three companies listed here, focusing on providing replacement parts to collision and mechanical repair shops. These include recycled, salvaged and refurbished parts and even complete engines. The company bills itself as “the nation’s largest provider of alternative vehicle collision replacement products,” but also operates in Canada, Mexico, Central America and Europe.
LKQ acquires parts by purchasing vehicles “typically severely damaged by collisions and primarily sold at salvage auctions or pools.”
Edgar’s clients hold shares in LKQ.
The stock has returned 238% over the past five years, but is down 20% this year through Thursday’s close at $26.87. The shares dropped 9% on Jan. 15 after Prescience Point — which provides recommendations to short sellers and said it would profit from a decline in the shares — said LKQ’s “ineffective roll-up” of acquired companies had generated no free cash flow. LKQ said the report contained “numerous inaccuracies.”
Then the shares fell 7% on Jan. 21, after LKQ confirmed it had been sued by Chrysler LLC , with the auto maker claiming certain after-market parts sold by the company had infringed design patents, “elating to the Dodge Ram pickup truck.” LKQ said it would defend itself and that the parts in question brought in less than a tenth of a percent of its 2013 revenue.
First-quarter revenue was up 36% to $1.63 billion, which mainly reflected acquisitions. The gross margin narrowed to 40.1% from 42%. Net income rose 24% to $104.7 million, while EPS advanced 21% to 34 cents, as the average share count grew by 1%.
Cash flow per share for the first quarter was unchanged at $3.20, according to FactSet.
O’Reilly Automotive Inc.
O’Reilly Automotive Inc.
of Springfield, Mo., operates 4,166 stores in 42 states. During 2013, about 58% of sales were to retail “do it yourself” customers, with the rest going to professionals.
The stock has returned 315% over the past five years, which is the best performance among the four stocks listed here.
First-quarter sales rose 9% to $1.73 billion, while the gross profit margin improved to 51% from 50%. Comparable-store sales were up 6%. Net income rose 13% to $173.9 million, and EPS was up 18% to $1.61, as buybacks lowered the average share count by 5%.
O’Reilly Automotive CEO Greg Henslee, in the company’s earnings release on April 23, said the company had achieved its “21st consecutive quarter of 15% or greater diluted earnings per share growth.”
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View more information: https://www.marketwatch.com/story/4-car-parts-suppliers-that-keep-the-money-rolling-in-2014-06-13