With the average age of vehicles being more than 10 years, car parts and car maintenance will become more and more necessary. Even winter is expected to be comparably colder this year, which makes servicing your car all the more essential. And that’s good news for car part retailers.
Thus, it’s no surprise that stocks of auto parts companies have enjoyed solid gains. But the question is, which one do you think will stay ahead of this trend?
Advance Auto Parts, Inc. (NYSE:AAP) has been a consistent performer, having increased revenue over 21% the past five years. It’s also increased its operating margin from 8.1% in 2008 to 10.6% in 2012. Although it operates more than 3,800 stores, its smaller than AutoZone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY), which operate over 5,000 and 4,000 stores, respectively.
Rapid expansion
A company needs to expand intelligently to strengthen its position in the industry. And Advance Auto Parts, Inc. (NYSE:AAP) seems to be doing just that, having opened 137 new stores in 2012 and acquiring 21 stores from Strauss Auto Parts. Recently, it opened 56 new stores and acquired 124 BWP stores, which should push its bottom line.
The BWP acquisition is expected to contribute $170 million in revenue this year. In addition to expansion activity, there is $434 million left in its stock buyback program. Both of these conditions favor investors.
Another contender
O’Reilly Automotive Inc (NASDAQ:ORLY) recently entered the New England market by acquiring Maine based VIP Parts Tires & Service. This acquisition gave it 56 retail stores in Maine, New Hampshire, and Massachusetts. The 1300 stores acquired from CSK Auto in 2008 have also performed well and management expects CSK stores to reach $1.8 million per unit.
In the latest quarter, it posted a 19.3% increase in earnings to $1.36 per share (compared with $1.14 in the year-ago quarter), exceeding estimates by a penny. Revenue during the quarter scaled up 4% to $1.59 billion from $1.53 billion year over year. O’Reilly Automotive Inc (NASDAQ:ORLY)expects to continue its solid earnings and expects between $5.57 to $5.67 per share which blows away estimates.
Peer comparisons
| AAP | ORLY | AZO | |
|---|---|---|---|
| Operating Margin | 10.17% | 15.72% | 19.25% |
| Forward P/E | 13.73 | 16.83 | 13.40 |
| PEG 5 Yrs | 1.42 | 1.17 | 1.12 |
| D/E Ratio | 47.62 | 52.88 | N/A |
| P/FCF | 14.78 | 15.98 | 24 |
| EV/EBITDA | 7.55 | 11.33 | 9.69 |
| ROA | 9.05% | 10.62% | 16.40% |
| ROE | 33.43% | 23.97% | N/A |
| Book Value Per Share | 17.36 | 18.66 | -43.2 |
All three companies expect the same earnings growth over the next 5 years. But O’Reilly’s high P/E makes it an expensive choice considering that of its peers. Likewise, O’Reilly Automotive Inc (NASDAQ:ORLY) is also expensive on EV/EBITDA basis.
AutoZone problems
AutoZone, Inc. (NYSE:AZO) has the best operating margin and return on assets which helps to explain why the company has been so successful and has the largest store base among the three companies. But it takes a hit when its debt and price to free cash flow is examined.
AutoZone, Inc. (NYSE:AZO) has total debt of $4 billion versus just $133.68 million in cash. And that really reduces its book value per share. Obviously, this is a big problem. If things start to go against the industry, AutoZone may have trouble covering its debt load. This is a big issue when considering a stock for investing.
Foolish takeaway
Both Advance Auto Parts, Inc. (NYSE:AAP) and O’Reilly Automotive Inc (NASDAQ:ORLY) boast strong financials while AutoZone, Inc. (NYSE:AZO) has a pile of debt to deal with. On the surface, Advanced Auto Parts appears to be cheaper than O’Reilly Automotive, despite its higher operating margin and larger store base.
Ultimately, Advanced Auto Parts seems a better bet as its cheaper and its growth prospects are in line with that of O’Reilly Automotive Inc (NASDAQ:ORLY). As the automobile industry continues to rebound, so too should businesses that operate in the auto part industry. So perhaps you should take a look at Advance Auto Parts, Inc. (NYSE:AAP), of the three, its the best in class.
harsha lohia has no position in any stocks mentioned. The Motley Fool owns shares of O’Reilly Automotive.
The article The Best Company to Maintain Your Portfolio originally appeared on Fool.com.
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