Auto repair supply stores might not be the next big thing and they are not as glamorous as the next big tech thing – but that doesn’t mean that they can’t or shouldn’t be a part of your investment portfolio. People are keeping their cars for longer periods of time – and the likelihood that they will need some type of service increases exponentially with age.
Mark Seng of IHS Markit blames the increase on the improved quality of new vehicles, but whether it is that, the economics of the situation, or a combination thereof, these circumstances introduce a strong possibility for your investment portfolio. “Increasing numbers of vehicles on the road builds a new business pipeline for the aftermarket,” says Seng. “More vehicles that will need repair work and service in the future.”
While people could take their cars into “the shop,” research suggests that many people do the work themselves. A 2015 study from Autotrader found that some 72% of people in the United States take care of their own vehicle maintenance. All those people need someplace to buy their auto supplies.
Some of that demand may slacken over the years. For instance, millennials are not really interested in owning cars, let alone fixing them on their own – and even if they were, most don’t know how to change a tire.
That trend will eventually limit the market for auto supply stores. There is also a risk posed by automakers themselves. While it is not illegal currently to work on your own car, it may be one day.
A few years ago, several vehicle manufacturers banded together to try to impose copyright law to prevent people from repairing or modifying their own vehicles.
They ultimately lost, with the US Copyright Office ruling in favor of car owners, but the win was a temporary one. They only granted an exemption for two years.
Before investing in auto repair retail companies, it is important to understand these risks as well as the potential issues and opportunities posed by the companies themselves. Let’s start by looking at AutoZone (NYSE:AZO) and Advance Auto Parts (NYSE:AAP).
Is AutoZone Stock Worth Buying?
AutoZone has traded in a 52-week range from $560.82 to $797.89. At this price, it is trading at 16 times its earnings and 13.87 times its future earnings. This is fairly good compared to its industry with averages a current PE of almost 20x and a future PE of nearly 18x.
In September 2018, the company made good on promises it made in May that sales were growing. While the increase in revenue in 4Q18 versus 4Q17 was anemic at 1%, net income between the quarters rose by 14% to $494 million from $434 million. AutoZone also added 78 stores to its roster.
“We expected our sales, particularly in the Rust Belt, to increase this summer and, for the most part, that materialized. While these were positive developments, we believe we have further opportunities to improve our operations and results,” says Bill Rhodes, AutoZone CEO. “As we are investing to grow, we will remain committed to our disciplined approach to increasing operating earnings and utilizing our capital effectively.” Some of the areas in which the company is focusing on include online sales and more distribution centers.
Overall AutoZone is optimistic that between the number of aging vehicles on the road and low gas prices, people will continue to work on their own cars.
The thing is that most investors are NOT impressed and the company’s share price reflects that.
Is Advance Auto Parts Stock Worth Buying?
Advance Auto Parts is trading at the higher ends of its 52-week range from $78.81 to $171.50. The company is priced a little high to its industry. Its stock is trading at almost 23x times its current earnings and 21x times its future earnings – but, Advance Auto is reporting growth.
In the most recent quarter, sales increased by 2.8%, coming in at $2.33 billion; consensus estimates put the figure at $2.27 billion. Same-store sales increased by the same percentage and the company even raised its revenue guidance to $9.5 billion from $9.3 billion.
“Our relentless focus on strengthening our Customer Value Proposition while embracing an owner’s mindset on cost and cash resulted in improved sales and profit performance in the second quarter,” said Tom Greco, AutoZone President and CEO.
The company also announced a new share buyback program. It plans to buy some $100-$200 million in shareholder stock by the end of 2018 and as much as $600 million in total.
AutoZone Vs Advance Auto Parts Stock Summary
Buying stock in an auto repair parts company is risky. While there is a market there, the longevity of that market is not guaranteed. Even though both AutoZone and Advance Auto have strong points, opening a long position without keeping a watchful eye on the industry and their respective sales may not be the best thing for your portfolio.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.