These Aftermarket Retailers Are Still Good Investments

Advance Auto, O'Reilly, and AutoZone have outperformed the market in the last year, and several factors indicate that they should do the same in the future.

May 12, 2014 at 10:55AM

The average age of vehicles on U.S. roads is at an all-time high of 11.4 years , up from just 9.8 years in 2002. This number is set to rise further according to an NPD survey, which shows that 75% of the surveyed population will still be holding on to their vehicles instead of buying a new one. In fact, barely 14% are inclined to buy a new vehicle in 2014 as per the survey. 

Moreover, ageing vehicles and inclement weather require more vehicle repairs. These are the perfect tailwinds for auto aftermarket retailers such as Advance Auto Parts (NYSE:AAP), O'Reilly Automotive (NASDAQ:ORLY) and AutoZone (NYSE:AZO). Let's take a closer look at each of them.

Advance Auto is on a roll
During fiscal 2013, Advance Auto faced unseasonably warm weather and a late start to the spring selling season. Advance Auto witnessed an acceleration in consumer demand from the third quarter onwards, which received a boost during the fourth quarter as a result of the extraordinarily cold winter weather.

The company performed well both in the do-it-yourself, or DIY, and the commercial segments. As a result, it clocked better-than-expected sales growth of 6% year over year. On the heels of robust top line growth, earnings per share climbed 6.8% as compared to the year-ago quarter.

As per Advance Auto, 80% of the vehicles on the road are over six years old, and deferred maintenance reached record levels in 2013. These two factors will be good growth drivers going forward. In addition, the extended deep-freeze in the eastern U.S. has benefited the company and will continue to do so in fiscal 2014.

However, deferred maintenance and macroeconomic headwinds like government health care reforms and a very uneven economic recovery did take its toll on the full year comparable store sales, or comps, which declined 1.5% year over year. Despite the decline in comps, total sales increased due to the acquisition of BWP and addition of new stores.

For the past six years, Advance Auto has been bolstering its commercial business through strategic acquisitions and initiatives. The company sees this as a major growth driver going forward. The acquisition of General Parts, announced early this year , is one such strategic move. This brings to its fold 38 Generals Parts distribution centers, 1,248 company-operated Carquest locations across the U.S. and Canada. Also, with the addition of Worldpac, the company has solidified its position as the market leader in the imported parts market space.

These initiatives make Advance Auto the largest automotive aftermarket business-to-business e-commerce platform in North America. It has also become the No. 1 automotive aftermarket parts provider, moving ahead of its rival O'Reilly Automotive.

O'Reilly is trying to get better
O'Reilly's first quarter of fiscal 2014 was highlighted by impressive comps growth of 6.3% year over year, better than Advance Auto's comps growth. A higher average ticket and stronger traffic fueled the comps growth during the first quarter. On the back of strong comps, sales in the quarter increased 9% year over year to $1.7 billion. The robust top line growth led to the 21st consecutive quarter of more than 15% growth in earnings per share, which increased an impressive 18.4%. 

The inclement weather during the first quarter fueled growth in the cold weather-related categories such as batteries, rotating electrical, heating and cooling, and wiper blades. In addition, the bad weather, coupled with bad roads, fueled sales in car repairs and boosted sales in categories such as ride control, chassis parts, and driveline. The extreme weather conditions have also been responsible for the good performance of the DIY segment of the company.

Going forward, O'Reilly believes that this combination of bad weather and bad roads will benefit it in the upcoming quarters too, as parts failures drive up sales.

AutoZone is trailing
A look at the stock price performance during last year clearly positions AutoZone as the laggard in its peer group. But all three have outperformed the broader market, as seen in the chart below.

AAP Chart

AAP data by YCharts

AutoZone has been doing well as far as its financial performance is concerned. The company reported its 30th consecutive quarter of double-digit EPS growth in the second quarter of fiscal 2014. Its comps grew by a healthy 4.3% year-over-year, driving the top line up by 7.3%. Its top line growth during the quarter, like its peers, was driven by the bad weather.

The failure-related hard part categories experienced the highest growth in both retail and commercial. The company expects that the momentum of this segment will sustain going forward heading into the spring and summer seasons. Going forward, AutoZone expects to continue its streak of double-digit EPS growth, which is an indication of better times ahead.

Bottom line
All three aftermarket retailers have delivered solid gains to investors over the past year. Looking ahead, it wouldn't be surprising if all three continue outperforming the broader market since there are a number of factors in their favor. That's why investors should definitely take a close look at the aftermarket retail space.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Renu Singh 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

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, 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

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