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Rolling Along with Auto Parts Profits

By John Moore - Nov 9, 2013 at 12:07PM

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As more consumers fix their own vehicles, companies like O’Reilly Automotive, AutoZone, and Monro Muffler Brake will continue to grow.

The auto parts sub-sector contains several companies that are doing very well, even in this shaky economy. As more consumers fix vehicles on their own to forgo costly auto repairs, the companies that supply the parts, supplies, advice, and tools for this are booming.

Many investors simply look to investing in a big auto company like Ford, Toyota, or Honda. Those firms are great and have great value, but Big Auto has a major problem — changing tastes among consumers. Many consumers either don't want or can't afford to buy new vehicles. The new "part-time" American reality will leave many drivers lumbering along in their current vehicle for the foreseeable future. This is a trend that will fuel the auto parts industry. Lets take a look at the firms that are exceptional at providing "go-to" solutions for cash-strapped car owners.

Start small
The smallest firm in this sector is Motorcar Parts of America (MPAA 4.54%). This company focuses on getting drivers started, literally. It specializes in starters and alternators — two parts that often fail first on "cars with character." Motorcar Parts of America has also tapped into the whole do-it-yourself (DIY) culture. It only distributes parts via its own DIY-focused stores that provide weekend mechanics with help, hints, and a sense of belonging. With a D/E Ratio of 1.060, Motorcar Parts of America is not beholden to debt holders — their $100 million debt is not a deal-breaker. The stock is currently trading at a P/E ratio of 14. If you are daring, Motorcar Parts of America might be worth a look.

The big boys
Our next company is O'Reilly Automotive (ORLY 0.32%). This firm has a pot of gold at the end on its balance sheet. Great stores, good price points, and excellent customer service add up to value. The company uses its 4,000 stores in the U.S. as one-stop part-buying shops for consumers. O'Reilly's has a robust 21.51 P/E, and institutional investors (92% owned) love this safe-yet-profitable stock. O'Reilly only pays 3% on its debt and has an upward cash flow forecast — a projected growth rate of over 17%. O'Reilly Automotive is truly a premium stock in this automotive sub-sector.

The King Kong of the sector is AutoZone (AZO 0.48%). This firm has value and strength in its 5,109 retail locations. AutoZone has very loyal customers and products that fit with its customer base. The firm has beefed up its online retail with AutoZone's acquisition of the online auto retailer, and a greater online emphasis has seemingly worked: e-commerce accounts for 20% of total sales growth YTD. They've also looked overseas for sales; AtuoZone has opened more stores in Mexico and recently opened a store in Brazil. AutoZone does have debt — $4 billion — but its growth projections are above 14%. The company's shares are expensive, though, in the $460+ category. If you can afford this stock, buy it.

Dividends, please
Monro Muffler Brake (MNRO -0.81%) is the Swiss Army knife of the bunch. Affordable oil changes, great warranties, and quality service are all offered in one place. Monro is also the largest independent under-car repair company in America. This lets the firm get paid on both ends—helping the DIY crowd while servicing those who don't want to get their hands dirty. The company's share price is affordable in the $45+ range, and its dividend yield is a strong $0.95. With retail locations in 19 states operating under the Tire Barn, Autotire, and Mr. Tire names, along with a host of regional brands, Monro Muffler Brake will continue to grow in this economy.

The last firm on the list is Advance Auto Parts, (AAP 0.29%), a specialty automotive aftermarket retailer. The company offers anything from wiper blades to antifreeze. This firm wants to topple AutoZone, and to do that Advance Auto Parts recently acquired General Parts International for $2.04 billion. This acquisition gives Advance Auto Parts combined annual sales of $9.2 billion — $200 million more than AutoZone. Advance Auto Parts share price is up 26% YTD and has a steady P/E of 17.80 — and continues to provide a good return on investment (it has a whopping 22.01 operating metric) while adding a small dividend yield of $0.24. At $98 per share, while not cheap, the shares are a great investment opportunity.

Affordable, profitable, and reliable—pick two
O'Reilly, AutoZone and Advance Auto Parts are the safest bets of the bunch. All  are undervalued right now and can only profit from the current trend of car owners stretching their budgets by fixing their existing vehicles themselves. Meanwhile, Monro Muffler Brake and Motorcar Parts of America can provide value at a premium for those wanting to ride on the wild side.

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Stocks Mentioned

AutoZone, Inc. Stock Quote
AutoZone, Inc.
$2,169.27 (0.48%) $10.36
O'Reilly Automotive, Inc. Stock Quote
O'Reilly Automotive, Inc.
$641.12 (0.32%) $2.06
Advance Auto Parts, Inc. Stock Quote
Advance Auto Parts, Inc.
$183.63 (0.29%) $0.53
Motorcar Parts of America, Inc. Stock Quote
Motorcar Parts of America, Inc.
$14.03 (4.54%) $0.61
Monro Muffler Brake, Inc. Stock Quote
Monro Muffler Brake, Inc.
$45.13 (-0.81%) $0.37
Icahn Enterprises L.P. Stock Quote
Icahn Enterprises L.P.
$48.88 (1.56%) $0.75

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

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