After a long and harsh spell of winter, US investors can find solace in spring, which holds nothing less than a solid promise for some retailers. Auto-parts retailers such as AutoZone, Inc. (NYSE:AZO) , O’Reilly Automotive Inc (NASDAQ:ORLY), and The Pep Boys – Manny, Moe & Jack (NYSE:PBY) are finding it better in spring with better-than-expected earnings.
AutoZone Smashed Earnings Expectations
AutoZone, Inc. (NYSE:AZO) smashed earnings expectations for the latest quarter. The company recorded its 27th consecutive quarter of double-digit growth in earnings per share (EPS) by registering a 6.8% jump in net profit to $17 million. Double-digit EPS growth was made possible by its share-repurchase program, under which AutoZone bought back 833,000 shares during the quarter. Growth in both net income and EPS was driven by a 4.5% jump in revenue to $2.2 billion for the quarter ended May 4.
This is on expected lines, as the company earlier projected faster growth in the second half of the financial year as a severe winter was expected to drive up auto repairs. This was exactly opposite of the scenario we saw last year, when warmer- than-usual winter weather required fewer repairs. The stock currently trades at a trailing-12 months price-to-earnings ratio of 17.1 and looks attractive at a forward multiple of 13.75.
Ways to play the bullish sentiment
The largest auto-parts retailer in the US has beaten Street expectations, and it sends a strong signal about the fundamental strength of the sector. However, buying the stock is not going to yield good returns now and investors need to think beyond the market leader.
O’Reilly Automotive Inc (NASDAQ:ORLY) offers a way to play this bullishness. The company will be out with its second-quarter results in July and is likely to follow what we saw with AutoZone, Inc. (NYSE:AZO). O’Reilly Automotive Inc (NASDAQ:ORLY) trades at a price-to-earnings ratio of 22.6, which is slightly above AutoZone but that is due to stronger fundamentals.
Another way may be to go long in The Pep Boys – Manny, Moe & Jack (NYSE:PBY) – a company with stores that cater to both ‘do it for me’ and ‘do-it-yourself’ customers. Fresh after a recent correction, the stock has enough momentum on its side to scale new heights.
Unlike AutoZone and O’Reilly Automotive Inc (NASDAQ:ORLY), it has yet to come up with its financial results for the first quarter. The stock is on a rebounding trail after AutoZone, Inc. (NYSE:AZO)’s bullish results and looks set to make the most of the opportunity. Even though the company has a less profitable operating structure, there is a hope of interest costs coming down due to a recent debt restructuring.
At the same time, management is following a customer-focused strategy, which has yet to be reflected in the company’s results. All things put together, The Pep Boys – Manny, Moe & Jack (NYSE:PBY) appears to be a dark horse which has enough scope for a turnaround. It may be risky compared to its peers, but conditions are just right for a financial turnaround. At a forward price-to-earnings ratio of 17.2 and a debt-to-equity ratio of approximately 0.4, The Pep Boys – Manny, Moe & Jack (NYSE:PBY) appears to be a worthy bet.
Foolish bottom line
Overall, the bullishness in the sector is not devoid of reason, and there are good chances of the earnings growth extending to the second-quarter results as well. Improving fundamentals and a reasonable valuation makes these stocks worth a second look.
The article Harsh Winter, Springing Gains originally appeared on Fool.com.
Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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