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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Valeo buys out Siemens from EV-parts undertaking

The acquisition “reveals inadequate potential customers for profitability,” Citigroup analyst Gabriel Adler wrote in a note, saying the firm’s outlook on margins and income for the company is weaker than predicted.

The unit is predicted to crack even this calendar year on a pretax cash movement foundation and make improvements to revenue and earnings margins in the coming decades.

“Strategically, this is a very significant stage for Valeo,” CEO Christophe Perillat explained on a call with journalists late Wednesday. “The terms of the offer are very good, and it will come at the ideal time.”

Valeo also declared a prepare to build a new electrical motor with Renault. The organizations claimed they would be the initially to mass create a 200-kilowatt electrical motor devoid of making use of unusual earth resources, starting in 2027. Production of the motor for the automaker’s personal needs will be based mostly at Renault Group’s plant in Cléon, France.

EV change

Suppliers are overhauling their functions to retain speed with an accelerating change to battery-powered automobiles.

Faurecia this week unveiled new economical targets and branding immediately after getting management of rival Hella in a bid to sharpen its personal EV choices.

Valeo and Siemens joined forces on Valeo Siemens eAutomotive in 2016 to make e-motors, axles and powertrain electronics for plug-in hybrids and complete-electric powered vehicles.

On Wednesday, Perillat reported the sector “is expanding very strongly” and predicted annualized 17.5 p.c expansion to 92 billion euros in 2030.

Automakers such as Stellantis and Volkswagen Team are rolling out new EV designs and manufacturing plans, but it can be unclear to what extent important sections this sort of as electric motors will be manufactured in-residence.

Perillat reiterated a preceding forecast set forth by the organization that 40 percent of the all round market will be outsourced to automotive suppliers.

By the conclusion of 2022, extra than 90 electric powered and plug-in hybrid styles will be fitted with Valeo’s electric powered powertrain techniques, motors, inverters or onboard chargers, the provider explained.

Siemens explained the sale of its stake would enhance its profits by close to 300 million euros in its fiscal second quarter, with a closing of the deal predicted in July.

The enterprise has been revamping its portfolio to target on software package and absent from equipment.

Valeo mapped out a collection of financial targets for the Erlangen, Germany-based mostly device that will be blended with its very own ‘Powertrain Systems’ business. These contain:

  • Pre-tax money stream of 350 million euros in 2025
  • Once-a-year revenue development of additional than 12 p.c to attain 8.5 billion euros by 2025
  • EBITDA margin to widen from 5.8 % in 2021 to far more than 8 % in 2022 and a lot more than 11 per cent in 2025

Reuters contributed to this report

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