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.

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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.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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