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Why Advance Auto Parts Stock Soared in May

By Lee Samaha – Jun 7, 2020 at 1:09PM

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A look at why the auto parts retailers have been so strong lately.

What happened

Shares in auto parts retailers Advance Auto Parts (AAP 4.50%) rose 15.2% in May, according to data provided by S&P Global Market Intelligence. The move marks a reversal of fortune for the sector, with O'Reilly Automotive and AutoZone also posting 8% and 12.5% gains, respectively.

The sector's rise is a consequence of a gradual resumption of activity in the economy, and specifically the amount of vehicle miles driven. When cars are driven more (particular older ones) they are subject to wear and tear. In addition, more miles driven means more likelihood of accidents. Both are good news for auto parts retailers.

Auto parts in the shape of a car.

Image source: Getty Images.

The reversal of fortune can be seen in the numbers from the Advance Auto Parts first quarter earnings report. Whereas year-over-year comparable same store sales fell 9.3% in the first quarter, management told investors that in the first four weeks of the second quarter, "comparable store sales improved significantly each week".

So what

The sales data from Advance Auto Parts helps confirm the idea that the auto parts retailers could somehow find themselves in a sweet spot in the economy in the coming year. A return to economic growth will obviously increase vehicle miles driven. However, if the growth is moderate then consumers won't be so incentivized to go out and buy new cars -- instead, they will drive and repair older cars.

While the scenario outlined above wouldn't be great news for all automotive stocks, it would strengthen the investment case for Advance Auto Parts.

Now what

Wait and see. If the recovery continues apace, then it will continue to show up in the sector's comparable sales growth. Meanwhile, keep an eye out for car sales data. If it continues to be weak then it's arguably good news for Advance Auto Parts. The company and its sector may find itself in a curious kind of sweet spot in the economy.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Advance Auto Parts, Inc. Stock Quote
Advance Auto Parts, Inc.
$163.37 (4.50%) $7.03
AutoZone, Inc. Stock Quote
AutoZone, Inc.
$2,197.71 (2.60%) $55.78
O'Reilly Automotive, Inc. Stock Quote
O'Reilly Automotive, Inc.
$718.19 (2.11%) $14.84

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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