AutoZone and 3 Other Auto Parts Stocks That Look Like Buys

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Morgan Stanley recently upgraded AutoZone, citing its ability to pass on higher prices to consumers.


Andrea Morales/Bloomberg

Auto parts retailers have outpaced the market for much of the pandemic. Current economic uncertainty should keep the group in the fast lane.

The share price of one such retailer,

AutoZone

(ticker: AZO), is up 1% this year. The stocks of

Advance Auto Parts

(AAP),

O’Reilly Automotive

(ORLY), as well as NAPA Auto Parts owner

Genuine Parts

(GPC) are all in the red in 2022. But with the exception of Advance Auto, they have held their ground better than the S&P 500, which is down about 20%.

Auto parts retailers have a reputation as defensive stocks—after all, car repairs can only be delayed so long, even during a downturn. There are reasons to think the stocks can keep outperforming.

“When you can buy these stocks at these prices, there’s an asymmetrical risk/return,” says Max Wasserman, founder of Miramar Capital, which owns shares of Advance Auto Parts and Genuine Parts. ”Yes, they could go down a little further, but the upside is much higher.”

Having a running car remains essential for most Americans. That gives them the incentive to keep repairing their cars, even as the vehicle fleet ages. The average car is more than 12 years old, according to S&P Global Mobility. Genuine Parts has estimated older models tend to require $800 a year in maintenance.

That is unlikely to change anytime soon. Consumers tend to delay big-ticket purchases like cars when they’re less confident about the economy, while the average price of a new car surged to $47,000 from $38,000 during the pandemic as chip shortages crimped vehicle output. Used cars hit record prices, putting them out of reach for many.

Company / Ticker Recent Price YTD Change 12-Mo. Forward P/E 2022E EPS Growth** Market Value (bil)
Advance Auto Parts / AAP $178.75 -25% 12.8 14% $10.8
AutoZone / AZO* 2,125.33 1 17.5 21 41.4
Genuine Parts / GPC 135.45 -3 17.0 13 19.2
O’Reilly Automotive / ORLY 630.52 -11 18.4 6 41.4

*Fiscal year ends in August **Year over year

Source: FactSet

The 2007-09 recession underscored the resilience of auto parts stores. The overall stock market fell roughly in half, but with the exception of Genuine Parts, auto parts retailers were largely unscathed. Shares of AutoZone and Advance Auto held their value during the downturn, while O’Reilly stock lost just 10%.

“While consumer spending in the auto parts segment did decline during the Great Financial Crisis, it declined less than overall durable goods and recovered faster” than both durable goods and overall personal consumption, notes Morgan Stanley analyst Simeon Gutman.

Nor is the specter of electric vehicles—which tend to be trickier for do-it-yourself repairs—a worry for auto parts retailers, analysts say. EVs and hybrids combined accounted for about 10% of U.S. auto sales last year, while less than 1% of cars on U.S. roads are electric.

“Absolutely EVs will proliferate; it’s not a silly argument, but it’s going to

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Zacks Industry Outlook Highlights O’Reilly Automotive, AutoZone, CarMax and Advance Auto Parts

For Immediate Release

Chicago, IL – March 7, 2022 – Today, Zacks Equity Research discusses O’Reilly Automotive ORLY, AutoZone AZO, CarMax KMX and Advance Auto Parts AAP.

Industry: Auto Retail Parts

Link: https://www.zacks.com/commentary/1877372/4-promising-stocks-in-spotlight-from-the-auto-retail-parts-industry

Growing demand for complex-technology embedded cars is providing impetus to the Zacks Automotive- Retail and Wholesale- Parts industry. The introduction of high-tech vehicles has led consumers to take more professional help, opening up more opportunities for the industry. While chip famine may cause near-term obstacles, the overall prospects of the industry participants, including O’Reilly AutomotiveAutoZone CarMax and Advance Auto Parts, hold promise thanks to rapid digitization, aging vehicles and the soaring popularity of electric vehicles.

Industry Overview

The automotive sector’s performance depends on its retail and wholesale network. Through dealership and retail chains, companies in the Zacks Auto Retail and Wholesale industry carry out several tasks. These include the sale of new and used vehicles, light trucks as well as auto parts, execution of repair and maintenance services, along with the arrangement of vehicle financing.

The industry, being consumer cyclical, is dependent on business cycles and economic conditions. Consumers and businesses spend more on big-ticket items when they have higher disposable income. On the contrary, when income is tight, discretionary expenses are the first to be slashed.

Importantly, the coronavirus pandemic has brought considerable changes in the operating environment, with the industry laying more emphasis on e-commerce retailing, and the trend is here to stay.

3 Key Themes

Tech Advancement Creating Opportunities: The industry is undergoing a radical change with evolving customer expectations and technological innovation acting as game changers. An increase in the number of new, complicated and high-tech vehicles has compelled consumers to opt for more professional assistance instead of opting for DIY (“Do It Yourself”).

Widespread usage of technology and rapid digitization are resulting in a fundamental restructuring of the automotive market and auto parts suppliers need to develop a detailed roadmap to make the most of the opportunities in a changing market scenario.

Increasing Longevity of Vehicles Serving as a Catalyst: The increasing average age of vehicles is driving the demand for auto parts. Per IHS Markit, the average age of U.S. vehicles hit a record of 12.1 years in 2021. The aging vehicles are a boon to the retail and wholesale auto parts industry. In a bid to ensure the long-term functioning of the aging vehicle population, customers are making investments to replace faulty vehicle parts and components, thereby boosting sales of retail and wholesale parts.

Chip Shortage Acting as a Spoiler: Shortage of semiconductor supply is hampering the balance between demand and supply and is adversely impacting vehicle production. Several auto companies have been forced to make production cuts, and the situation doesn’t appear to ease out till at least mid-2022. This is limiting the demand for retail and wholesale auto parts.

Also, rising commodity costs, a tough labor market and logistical challenges are acting as headwinds. Consequently, near-term revenues and earnings of industry

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