The auto parts industry plays a vital role in supporting the global automotive sector as it encompasses a wide range of products, from engine components and electrical systems to body parts and accessories. As the number of vehicles on the road increases, so does the need for replacement parts and maintenance services.
Against this backdrop, it could be a smart move to invest in fundamentally sound stocks O'Reilly Automotive, Inc. (ORLY) and AutoZone, Inc. (AZO) that seem well-positioned for growth, presenting investors with enticing opportunities to capitalize on their success.
The automotive parts aftermarket is forecasted to experience a CAGR of 5.5% from 2023 to 2033, reaching an estimated value of $984 billion. This projection emphasizes the steady growth anticipated in the industry, indicating a rising demand for automotive parts and accessories beyond the original vehicle purchase.
Demand for automotive parts in the aftermarket is driven by increased maintenance and repair activities carried out by vehicle owners, as stock vehicle parts such as air filters, fuel filters, spark plugs, and brake pads suffer wear and tear over time and must be replaced at regular intervals.
The global auto parts manufacturing market is expected to grow at a CAGR of 3.2% to reach around $2.74 trillion by 2028.
Additionally, a report by PWC identifies five key trends reshaping the automotive industry: Electrification, Autonomy, Shared mobility, Connectivity, and a Yearning for a sustainable future. The report highlights the rise of electric vehicles, autonomous driving, shared mobility services, vehicle connectivity, and the growing demand for sustainable solutions as crucial factors shaping the industry's future.
Moreover, the rising vehicle ages tend to be beneficial for aftermarket parts suppliers. S&P Global Mobility reported more than 284 million vehicles in operation on U.S. roads, slightly up from 283 million last year.
Overall, the auto parts industry is a critical component of the automotive sector, supporting vehicle production, maintenance, and repair. With the ongoing advancement of technology and the increasing demand for reliable, eco-friendly solutions, the industry is poised for continued growth and innovation in the years to come.
With that being said, let us evaluate the fundamentals of the above-mentioned stocks in detail.
O'Reilly Automotive, Inc. (ORLY)
ORLY is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories. Its offerings include new and remanufactured automotive hard parts and maintenance items, such as alternators, batteries, brake system components, belts, chassis parts, driveline parts, engine parts, fuel pumps, etc.
On February 22, ORLY marked a significant milestone in its history with the opening of its 6,000th store in Fort Gibson, Oklahoma. After 65 years of serving the automotive aftermarket in the United States and Mexico, this achievement underscores ORLY's commitment to exceptional customer service and the dedication of its Professional Parts People across the company.
ORLY’s sales increased 12.5% year-over-year to $3.71 billion in the first quarter (ended March 31, 2023), while its gross profit rose 10.7% from the year-ago value to $1.89 billion.
The company’s net income and EPS grew 7.3% and 15.5% from the prior-year quarter to $516.89 million and $8.28, respectively. Also, its operating income increased 7% from the year-ago value to $716.65 million.
Street expects ORLY’s revenue and EPS for the second quarter (ending June 30, 2023) to increase 8.5% and 13.8% year-over-year to be $3.98 billion and $9.99, respectively. Moreover, it surpassed the revenue and EPS estimates in three of its trailing four quarters, which is promising.
Its revenue and EPS have increased at CAGRs of 13.2% and 24.8% over the past three years, respectively, while its levered FCF has improved at a 34.8% CAGR in the same period.
ORLY’s shares have gained 44.4% over the past year to close the last trading session at $928.08.
ORLY’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality and a B for Growth, Stability, and Sentiment. In the 58-stock A-rated Auto Parts industry, it is ranked #17. To see additional POWR Ratings of ORLY for Value and Momentum, click here.
AutoZone, Inc. (AZO)
AZO is a retailer and distributor of automotive replacement parts and accessories. The company offers various products for cars, sport utility vehicles, vans, and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories, and non-automotive products.
For the third quarter that ended May 6, 2023, AZO’s net sales increased 5.8% year-over-year to $4.09 billion. Its gross profit rose 6.9% from the year-ago value to $2.15 billion. The company’s net income grew 9.3% and 17.5% from the prior-year quarter to $647.72 million and $34.12 per share, respectively. Also, its operating profit increased 9.3% from the year-ago value to $858.48 million.
The consensus EPS estimate of $45.45 for the fourth quarter (ending August 2023) represents a 12.2% improvement year-over-year. The consensus revenue estimate of $5.62 billion for the current quarter indicates a 5.1% increase from the same period last year.
The company has an excellent earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
Also, AZO’s revenue and EPS have grown at CAGRs of 11.8% and 23.1% over the past three years, respectively. Likewise, its levered FCF has grown at a 22.2% CAGR in the same period.
The stock has gained 21.3% over the past year to close the last trading session at $2,454.64.
AZO’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Quality and a B for Sentiment. Within the same A-rated industry, it is ranked #24. Click here to see the additional ratings for AZO (Growth, Value, Momentum, and Stability).
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ORLY shares were trading at $905.97 per share on Wednesday afternoon, down $22.11 (-2.38%). Year-to-date, ORLY has gained 7.34%, versus a 9.77% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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