Recovering from the global recession of 2009, the US auto industry followed the growth trend. This led to growth in the auto-parts industry as this market provides products to complement the auto industry. In this article, I aim to deliver a clearer picture on where the suppliers of auto parts and accessories – Dorman Products Inc. (NASDAQ:DORM), AutoZone, Inc. (NYSE:AZO), Advance Auto Parts, Inc. (NYSE:AAP) – stand. My argument makes a largely statistical case for suggesting which stock is the best bet for your profits.
Business updates
Dorman Products Inc. (NASDAQ:DORM), a supplier of replacement parts for the automotive-repair market, recently announced it is investing $6.5 million into an expansion project in Gallatin County in Kentucky in order to increase output and sales. Dorman Products Inc. (NASDAQ:DORM) bets largely on its product development strategy to grow sales, and the company benefits much from these efforts. The next room for increase in its revenue is a new product line – after-market parts for medium and heavy duty trucks – introduced a year ago.
A leading retailer and a distributor of automotive parts and accessories in the U.S., AutoZone, Inc. (NYSE:AZO) does business in the U.S. and Mexico and is expanding its footprint into Brazil. Recently, the company has been rolling out about 200 new stores yearly and for a total of 5,006 stores. The key feature of AutoZone, Inc. (NYSE:AZO) is its aggressive rate of repurchasing shares. The company has cut its outstanding shares by 58% over a nine-year period. Furthermore, AutoZone, Inc. (NYSE:AZO) has demonstrated its steadfast self-confidence during the great recession of 2009. The biggest concern is whether the company can continue purchasing its shares at the above-mentioned amazing rate.
Advance Auto Parts, Inc. (NYSE:AAP) is an auto parts and accessories retailer and runs its business primarily in the Northeastern, Southeastern and Midwestern States. The company is one of the key players in the industry and carries the highest level of inventory available per store ($600,000 / store) in the industry. Its key advantage is an availability of all parts on sale in every store, satisfying every customer.
Tracking financials
Dorman Products Inc. (NASDAQ:DORM) shareholders have experienced a 1,130% share price appreciation over the past five years. This is a phenomenal growth rate entirely due to the company’s intrinsic strategy and performance. Furthermore, in the first quarter, the company reported a sales increase of 15% to $154.4 million, while also increasing its operating margin from 18.1% to 19.4%.While first quarter earnings were promising, further evidence of Dorman Products Inc. (NASDAQ:DORM)’s ability to continuously perform can be seen by its continuously progressive EPS over the last ten years.
The most alarming sign for AutoZone, Inc. (NYSE:AZO) is that its current liabilities are much higher than current assets. The company should allocate 70% of its 2013 net income to service its current liabilities and as a result, only $300 million will be available for share repurchases (enough to obtain only 3% of its shares this year).
At this time, the average Advance store generates about $1.7 million in annual sales and its management wants to increase that number to $2 million. Although the company achieved revenue growth, its revenue and net income growth is far less than the industry average. However, Advance’s operating and net margins are above the industry average and thus the company earns higher profits despite its revenue growth being lower than the industry. In addition, there was a small stumble in 2011 when management reduced costs by cutting back on labor, which backfired.
Expectation for the future
For July, Dorman Products Inc. (NASDAQ:DORM) Products is introducing 126 new parts. This is after already announcing the introduction of 280 new parts to its offerings in June. In a report published last year, it was revealed that the average vehicle in the U.S. was 11 years old. This plays perfectly into the hands of Dorman, which offers a wide range of support for both older models along with the newer models.
In the coming years, Dorman will heavily fight for maintaining its high margins. Customer consolidation in the automotive industry causes problems for Dorman. As customers consolidate, they have more negotiating power with Dorman and are sometimes able to get extended payment terms or other benefits. This year, however, has seen a flurry of good news for new car sales, as the growth figures from major American car manufacturers looks encouraging. In its latest product announcement releases, Dorman has shown adaptability by introducing electrical components into its product mix, especially since these are present in the newer cars. This not only allows the parts being offered by Dorman to be perfectly compatible with new cars, but it also encourages customers to buy the more inexpensive electrical components to replace those which are faulty instead of going for the option of replacing the entire assembly.
AutoZone, Inc. (NYSE:AZO) has reached an exceptional rate of share buybacks and EPS growth by stretching its debt beyond any reasonable limits. If Autozone ignores reality and maintains its current rate of share buybacks, it will likely be risking bankruptcy. However, the company’s management currently doesn’t show any signs of yielding to reality and hence the worst-scenario is becoming more probable.
Advance Auto Parts, Inc. (NYSE:AAP) is planning to open approximately 180 new stores in 2013 in order to achieve more efficient distribution of parts and less administrative overhead. The organization reports its brilliant performance as it continues to post higher profits when compared to the industry averages, and is expected to earn higher profits in the future.
Final verdict
With the company’s core strategy of widening its product base and entering new markets for replacement component sales, I suggest buying Dorman Products. It will continue to add value to portfolios, just as it has been doing for the last ten years. If one was holding this stock five years ago, then the stock has clearly fulfilled its promise of growth and sustainability. Looking forward to the increases in new car sales and the company’s product mission of providing parts for these newer models gives me confidence that Dorman Products is in for more vertical travel on the price chart.
The article Which Auto Parts Supplier Can Make You Rich? originally appeared on Fool.com is written by Marina Avilkina.
Marina Avilkina has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Marina 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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