The aftermarket auto parts industry has been dominated by fast-growing growth stocks O’Reilly automotive and AutoZone. These two stock behemoths with 50 billion and 46 billion market caps respectively have dominated the industry and have been powerful consistent growers over the last couple of decades. Furthermore, because of their consistency they have also generally been reasonably valued with only the occasional bout of overvaluation.
On the other hand, both these stock behemoths also carry extraordinarily large amounts of debt and have now become overvalued. This brings me to the third largest player in the industry Advance Auto Parts. Although this is the third-largest of the major publicly traded auto parts retailers, its market cap is slightly below $9 billion and therefore a much smaller player. Generally speaking, Advance Auto Parts has also been the slowest and most inconsistent grower compared to its larger and more consistent and faster growing counterparts. On the other hand, Advance Auto Parts has recently become significantly undervalued while AutoZone and O’Reilly have moved into overvaluation territory. Normally these companies grow fast enough that even if you overpay for them their high rate of growth would still allow you to make some money. However, even though these companies have extremely high leverage, they are both overvalued and more to the point the growth rates are expected to slow as the law of large numbers is catching up to them.
In contrast, Advance Auto Parts, with its much smaller size and more moderate leverage is currently undervalued. Additionally, Advance Auto Parts offers a 4% dividend and a recently introduced stock buyback program. Consequently, I believe the company’s above average yield, low valuation, smaller size and more reasonable debt levels offers a great opportunity for investors seeking income and growth.
FAST Graphs Analyze Out Loud Video on O’Reilly Automotive (ORLY), AutoZone (AZO), Advance Auto Parts (AAP), Skyworks Solutions (SWKS)
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Disclosure: Long AAP, SWKS
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.