On Tuesday December 10th 2013, shares of auto parts suppliers were mixed on earnings results from Autozone (NYSE:AZO) and Pep Boys – Manny, Moe & Jack (NYSE:PBY), as well as on news of a non-earnings development for Advance Auto Parts (NYSE:AAP). With these updates and corresponding price changes, are any of these companies attractive to the Foolish investor? Or would it be wiser to stay far away from them?
Earnings results for Autozone and Pep Boys surprised
For the quarter, revenue at Autozone was expected to come in at $2.10 billion, roughly 5.5% above the $1.99 billion the company reported in the same quarter a year earlier. Unfortunately, revenue only rose by 5.1% to $2.09 billion. The company's earnings results were impressive enough to make up for the shortfall, however. The increase was primarily attributable to the addition of 181 new locations, but it was also aided by a 0.9% increase in comparable-store sales domestically.
Earnings per share for the world's largest auto parts supplier came in at $6.29, a mere $0.01 above forecasts and 16.3% above the $5.41 the company reported in the same quarter a year ago. The disparity between the company's earnings growth and revenue growth was due in part to a marginal improvement in costs, but it was mostly chalked up to a 7.7% decrease in common shares outstanding. As a result of the company's earnings, shares rose 3.17%.
Pep Boys, on the other hand, failed to impress. For the quarter, analysts expected revenue to come in at $521.74 million, 2.4% above the $509.61 million that the company reported in the same quarter last year. Unfortunately for shareholders, revenue fell 0.5% to $507.04 million as comparable-store sales dropped 2.8%. The fall in comparable-store sales was primarily attributable to a 3.6% decline in merchandise sales, partially offset by a 0.5% increase in service revenue.
According to the company's earnings release, earnings per share came in at $0.02, significantly better than the -$0.13 that management announced in the same quarter a year earlier. This was primarily due to a higher level of interest expense last year. Though nice to see, the earnings improvement fell far short of the $0.14 analysts hoped for. The company's share price fell 7.61% in response to this significant shortfall.
Advance Auto's refinancing makes the company better off
Putting earnings aside for a moment, we arrive at the interesting news surrounding Advance Auto. On Monday, management issued a current report further detailing a change in the company's financial status that was initially reported on Dec. 3. In essence, management decided to issue $450 million worth of debt and cancel a $750 million credit facility from 2011. As part of the cancelation, the company opened up a $700 million unsecured loan on top of a $1 billion revolving credit facility.
While a portion of the proceeds may go to general corporate expenses if management so chooses, the purpose of this increase in debt is to pay for the cost of acquiring General Parts International. This deal was initially announced in October but has proven to be a good stimulus for the company. The acquisition would put the company's consolidated sales of $9.2 billion on par with Autozone.
Peer vs. peer
Looking at the three auto parts retailers side-by-side, we can discern some interesting things. Over the past five years, revenue of Autozone has increased the most, rising by 34.2% from $6.82 billion to $9.15 billion. During this same timeframe, the company's net income jumped 54.7% from $657 million to $1.02 billion.
Similarly, revenue for Advance Auto increased 20.7% from $5.14 billion to $6.21 billion, while net income rose an impressive 62.9% from $238 million to $387.7 million. Though the bottom line growth is more attractive than Autozone's, it's stemming from a small base and likely won't continue at such a tremendous rate unless its revenue growth can improve. With the company's planned acquisition of General Parts International, this may give shareholders something to look forward too. As a private company, though, it's difficult to determine the impact that the deal will have on Advance Auto's competitive position until after the transaction is completed.
In comparison, Pep Boys has experienced a virtual standstill in revenue growth as sales improved by a mere 8.5% over the same timeframe. Net income has risen from -$30.4 million to $12.8 million, but has been on a gradual decline from its five-year high in 2011.
Based on the data provided herein, it appears as though Autozone's performance is more attractive than its peers. Not only does the company have amazing revenue growth, but it has also experienced some rather appealing earnings growth. Unfortunately for shareholders of Pep Boys, it doesn't look like the company will prove a substantial threat to either of its larger competitors anytime soon. There is some potential upside for Advance Auto if its acquisition is successful in creating shareholder value.
I would be attracted to Autozone, but the transformation taking place at Advance Auto can't be ignored. For the enterprising investor, it might be worth taking a step back and waiting for Advance Auto to finish its transaction to see what kind of value is left on the table. At nearly 20 times earnings compared to the 17 times that investors are paying for Autozone, however, the Foolish investor would need to see something truly impressive after the deal before deciding to make an investment in it over its healthier peer.
Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.