Will the Auto Parts Industry Keep Surging?

Jianyu Zhao |

auto parts, General Motors, Ford, International Trade Administration, Autozone, Advanced Auto Parts, Pep Boys, O'Reilly Automotive

Automobiles have become a ubiquitous method of transportation for humans. People are used to driving cars for working, shopping, and traveling. Given the necessity, famous automakers like General Motors (GM) and Ford (F) produce hundreds of thousand automobiles every day to fulfill the public’s need. There’s always a high demand of autos, implying a growing market with huge profits.

The automaker industry also trickles down to other related markets, such as auto parts and automotive suppliers. The auto parts industry especially is very sensitive to the automakers’ fluctuations because of their natural bond.

Automotive parts can be divided into two major categories: original equipment and aftermarket parts. According to a study by International Trade Administration (ITA), original equipment production accounts for an estimated two-thirds to three-fourths of the total automotive parts production. Thus, automotive parts consumption is heavily linked to the demand for new vehicles. In other words, if vehicle production decreases, automotive parts production follows.

Difficulties the Auto Parts Industry Face

But pressure from global competition cannot be neglected. When Japanese and German-based vehicle manufacturers gain U.S. market share, they maintain the relationships with their tradition supplier base. Usually those foreign supplies have lower prices than the domestic products. American auto parts have to look abroad to survive. According to a report of ITA, auto parts exports have experienced a 4.9% increase from $1.834 billion to $1.924 billion as of March 2014.

In the meantime, people have accrued higher incomes with the recovering economy, which may lead to an increase in customers making new car purchases as opposed to fixing up their older cars. Auto sales in the U.S. grew 8.0% to a six-year high of 15.6 million vehicles in 2013.

Government and banks also offer inciting methods to encourage people to buy new cars. The U.S. Department of Energy lent more than $8.5 billion to a few automakers under the Advanced Technology Vehicles Manufacturing Incentive Program. Auto parts sales suffer from such a trend in a short term. On July 7, the auto parts stores sector dropped 0.4%, following an overall decreasing current over the previous five days.

Auto Parts Companies with Potential

However, the auto parts industry seems to look strong in the near term. People tend to keep their aging cars as long as the cars have no fatal damages. According to a forecast made by HIS Automotive, the average age of vehicles on U.S. roads probably continues to remain above 11 years and is expected to 11.5 years by 2018. Americans would rather repair the worn cars than buying a new one, which might be a bright sign for the U.S. auto parts stores. The longer people keep a car, the higher demand of auto repairs will be.

When it comes to specific examples, the major auto parts players in the U.S. market – AutoZone (AZO) , Advance Auto Parts (AAP) , Pep Boys (PBY) , and O’Reilly Automotive (ORLY) – have had satisfying performances in the recent fiscal quarters.

AutoZone

On June 18, AutoZone’s board of directors authorized an additional $750 million of the company’s common stock in connection with its ongoing share repurchase program. So far, the company has repurchased 1.877 million shares of its common stock for $912 million, at an average price of $486 per share.

The action, based on a solid financial performance, allows the company to focus on enhancing shareholders’ returns while maintaining adequate liquidity for its finance structure. According to its financial results for Q3 of fiscal 2014 that ended May 10, AutoZone’s net sales have had an increase of 6.2%, and domestic same store sales, or sales for stores open at least one year, increased 4% for the quarter. Net income has a year-over-year had an increase of 7.4% from $265.6 million to $285.2 million.

“While failure related categories were particularly strong in the second quarter, as expected, the deferrable maintenance categories rebounded in the third quarter and we expect that trend to continue through the summer,” said CEO Bill Rhodes. “As we have routinely stated, we will remain committed to our disciplined approach to growing operating earnings and utilizing our capital effectively.”

Advance Auto Parts

Another large player in the industry, Advance Auto Parts, acquired General Parts for $2.04 billion in 2013. According to its financial results for Q1 of fiscal 2014 that ended April 19, Advance Auto Parts had a comparable increase of 35.5% in earnings per diluted share (EPS) to $2.25. Total sales for Q1 increased 47.3% to $2.97 billion, which was driven by the acquisition of General Parts, solid execution delivering a comparable same store sales increase of 2.4% and the addition of new stores over the past 12 months.

“Our base business and integration work continue to progress well and our synergy work is on-track further reinforcing our confidence in driving long term value from the acquisition,” said CEO Mike Norona. “Given our performance in the first quarter and the execution momentum we continue to build, we are raising our full year guidance for Comparable Cash EPS to be in the range of $7.30 - $7.50.”

Pep Boys

Pep Boys, a leading automotive retail and service chain hit a big bump in April because of a disappointing financial report. But since then, the company’s stock has been recovering. On June 9, Pep Boys released its financial results for Q1 of fiscal 2014, announcing an increase of 72% in operating profit. In addition, annual sales increased 0.5% from $536.2 million to $538.8 million. Currently, the stock has a price-to-earnings ratio of 47.5, which is much higher than the industry average of 22.3, implying that most investors believe that Pep Boys very likely keep growing. The debt-to-capital of 27% is also much lower than the industry average of 44%. Omni-channel retailing through digital and physical stores mark noted metrics for the company.

“Our customer strategies are gaining traction and our target customer groups have been endorsing our improved customer experience with new and repeat business, but we need to get to critical mass to accelerate our performance,” said CEO Mike Odell. “We also continued to see strong growth in pepboys.com digital operations. From a mix of business perspective, sales through digital operations accounted for 4.0% of our sales during the first quarter as compared to 2.3% for the prior year.”

O'Reilly

As a specialty retailer and supplier of automotive aftermarket parts, O’Reilly had a downslide from February to April, but the company’s stock rebounded after releasing a positive financial report on April 23. According to the results, sales for Q1 that ended March 31, 2014 increased 9.0% from $1.59 billion to $1.73 billion. The company’s gross profit saw a year-over-year increase of 10% from $799 million to $878 million. Currently, O’Reilly has a price-to-free-cash-flow of 60.01, higher than the industry average of 57.00, demonstrating that most investors consider the company is worthy for the high stock’ price.

“Our comparable store sales results for the first quarter exceeded our expectations, and the top end of our guidance range, driven by Team O’Reilly relentless focus on delivering the highest level of customer service in the industry,” said CEO Greg Henslee. “Once again, our record-breaking performance is the direct result of the hard work and commitment of our dedicated Team Members.”

There’s Always An Exception

With a current market cap of $133.7 million, U.S. Auto Parts Network has kept an overall growing trend since it released an encouraging financial report for Q4 of fiscal 2013. The company had an annual increase of 4.0% of net sales from $65.4 million to $68.0 million, according to its recent financial results. However, comparing with other rivals, U.S. Auto Parts Network seems vulnerable. In addition to having the lowest market cap among the companies above, the company has a net profit margin of 0.29, which is much lower than the industry average of 8.40. That suggests the company has trouble to control costs. The company’s stock dropped 3.94% to $3.66 per share on June 8, continuing the downward trend from one week before. Whether U.S. Auto Parts Network will catch up with other competitors is still uncertain.

Making proper adoptions and following wise strategies are ways that the auto parts companies need to walk. Given that the whole industry’s bright developing outlook, it’s safe to say that those stocks could rise in the long run.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
AZO AutoZone Inc. 783.74 2.98 0.38 242,616
ORLY O Reilly Automotive Inc. 273.94 0.88 0.32 722,707
GM General Motors Company 35.41 -1.02 -2.80 22,753,352
F Ford Motor Company 12.24 -0.19 -1.53 38,689,842
PBY Pep Boys-Manny Moe & Jack n/a n/a n/a 0
AAP Advance Auto Parts Inc W/I 170.14 -0.62 -0.36 487,012
HPY:CA Happy Creek Minerals Ltd. 0.17 0.00 0.00 0

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