Which of the Big Three Auto Parts Chains Should You Invest In?

More people have given up trying to fix their own cars -- which auto parts chain will be the biggest beneficiary?

Apr 3, 2014 at 2:56PM

Web
Source: O'Reilly Automotive

The auto parts industry is a tale of two markets, with the largest players, Advance Auto Parts (NYSE:AAP), AutoZone (NYSE:AZO), and O'Reilly Automotive (NASDAQ:ORLY), benefiting to different degrees.

There are two key markets in the auto parts business: the "Do-It-Yourself" Auto Aftermarket (DIY) and the "Do-It-for-Me" Commercial Auto Aftermarket (commercial market). The former relates to individuals who repair their own vehicles without the assistance of mechanics, while the latter comprises those who send their cars to the shop for repairs. According to data from the Automotive Aftermarket Industry Association (AAIA) 2014 Factbook, the commercial market ($59 billion) is about 25% larger than the DIY market ($47 billion), based on annual sales.

There are two key reasons the commercial market is bigger and also expected to grow faster than the DIY market in the near future. Firstly, vehicles are becoming more technologically advanced and complex, resulting in more car owners turning to professionals for assistance. Secondly, it's all about opportunity cost. The time spent on repairing one's own car might be better utilized elsewhere that is more profit enhancing, like taking a part-time job or getting additional educational qualifications.

Closing the gap
While AutoZone is the top player in the DIY market, it only has a 2% market share of the commercial market and is trying to further build its presence there. AutoZone has several initiatives in place to do that.

Firstly, AutoZone will add new commercial sales programs. It already added 174 new programs for fiscal 2014, compared with 93 programs during the same period a year ago. Secondly, AutoZone targets to increase its per program productivity. With about 30% of its commercial programs under three years old, AutoZone has the potential to grow average revenue per program as these "young" programs mature. Thirdly, it wants to increase its hard parts product availability, given that hard parts account for the bulk of commercial market demand.

Recent results have been encouraging. AutoZone grew its sales from the commercial market by 13.6% for the trailing 12 months. However, with close to only three-quarters of its 3,000 odd stores in the U.S. having commercial sales programs, there still remains ample room for growth.

Transformative acquisition
Unlike AutoZone, which has chosen to build up its commercial market presence organically at the moment, Advance Auto Parts has transformed itself with the completion of the acquisition of its peer, General Parts International in January this year. While the commercial market used to account for 40% of Advance Auto Parts' total revenues, it will contribute approximately 55% of the combined entity in the future.

General Parts boasts two leading commercial brands: WORLDPAC, the market leader in wholesale delivery of import parts, and CARQUEST, a distributor of auto parts to commercial (85% of sales) and retail customers. WORLDPAC has gained the trust of professionals over the years, as evidenced by it being named Overall Best Program Distributor for Replacement Parts as part of Frost & Sullivan's survey of automotive technicians.

On the other hand, CARQUEST is a brand with a a history that spans half a century, and it owns more than 1,200 stores across the country. Advance Auto Parts plans to achieve synergies between its operations and that of CARQUEST by transferring the commercial capabilities of CARQUEST to Advance stores, and vice-versa, passing on its DIY capabilities to CARQUEST.

Advance Auto Parts has made progress in expanding its commercial business. In the most recent fourth quarter of 2013, its commercial sales mix increased from 38.1% the same quarter a year ago to 40.4% now, moving it closer to its 55% commercial sales mix target.

Oro
Source: O'Reilly Automotive.

Back to basics
While both AutoZone and Advance Auto Parts have grown their commercial business by organic and inorganic means, respectively, it is worth keeping in mind the critical success factors of any parts business, notwithstanding the identity of the end-customer (commercial or retail). Nothing frustrates a customer more than having to go to multiple stores to get all the parts he needs.

O'Reilly Automotive has the best parts availability in the industry, thanks to its extensive distribution infrastructure that ensures all its stores have sufficient inventories. It has 24 distribution centers, each stocking 147,000 SKUs, sending parts to its service stores at least five times a week. O'Reilly Automotive has plans to add two new distribution centers by the end of the year.

More importantly, O'Reilly Automotive also has the highest commercial sales mix among its peers, at 42%. This serves as an indication that its commercial customers appreciate its industry-leading parts availability.

Foolish final thoughts
The commercial market's growth hasn't escaped the attention of large auto parts chains seeking to gain a share of the pie. However, a successful auto parts retailer is defined by its parts availability, and not who it sells to. In that aspect, O'Reilly Automotive stands out from its peers and is the best-positioned to benefit from the growth of the commercial market.

Boost your 2014 returns with The Motley Fool's top stock
Customers see parts availability as the key factor in choosing an auto parts chain, O'Reilly Automotive scores well on this criteria, given its distribution network. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Mark Lin has no position in any stocks mentioned. The Motley Fool owns shares of O'Reilly Automotive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers