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Auto parts stocks still rolling along

Andrew Leckey

Andrew Leckey

Would you like a license-plate holder or floor mats to go along with that quart of oil and new battery? Not surprisingly, stores that sell auto parts and accessories represented an industry that benefited from the recession.

Cost-conscious Americans have stretched how long they keep their cars before trading them in for newer models and have been willing to do basic upkeep and repair work on their vehicles themselves.

As new car sales ramp up in 2011, it remains to be seen whether those do-it-yourself habits continue unabated and auto-parts stores remain on a roll. But even if sales do slip a bit, as most experts predict, their future remains solid because they sell items that their customers consider necessary.

“You just can’t get away from the fact that people are keeping their cars longer – now averaging more than 10 years,” said Mark Mandel, New York-based analyst with ThinkEquity LLC. “Even though these stocks were up roughly 70 percent last year, I don’t think they’re overvalued because there are still market-share opportunities available to them.”

These businesses are in strong financial shape and recent slippage in their stock prices coming off of last year’s gains could make them even more attractive long-term investments.

There is more to them than meets the eye: Besides selling automotive parts to consumers, they also enjoy a lucrative business providing parts to garages and other auto repair businesses, he noted.

Advance Auto Parts Inc. (AAP), with more than 3,500 stores in the U.S., Puerto Rico and Virgin Islands, is a stock recommendation of Mandel. The firm operates under the Advance, Western Auto, Advance Discount Auto and Autopart International brands. Darren Jackson, the company’s CEO since 2008, previously spent seven years as CFO of the Best Buy Inc. consumer electronics chain. It is in excellent financial health.

There’s also a lot of upside to the stock of O’Reilly Automotive Inc. (ORLY), which has more than 3,500 U.S. stores, Mandel believes. Around since 1957, O’Reilly acquired CSK Auto in 2008 to have a strong presence on the West Coast. Gregory Henslee, who became CEO in 2005, is a seasoned veteran who’s been with this financially-strong firm for more than 25 years.

“This is a defensive stock group, no question about it, because they do best when the economy is doing poorly and people can’t buy new cars,” acknowledged Mandel, who nonetheless sees them as providing a service that will always make some sense.

In addition, the Internet, which has ravaged the business plans of so many storefront companies, may not be as much of a threat to the businesses of these stores as one might guess.

“If you want to change the oil or brakes on your car on a Saturday afternoon, do you really want to order from an online retailer and wait for it?” asked Greg Melich, analyst with ISI Group in New York. “Or would you rather just run down to AutoZone, get the part you need and take care of your car?”

So long as they continue to provide good customer service and have the necessary goods readily available in stock, auto-parts stores are protected from Internet competition, Melich contends. In addition, four years ago there were about 21,000 car dealers in the U.S. and that number is now down to about 17,000, said Melich, which has provided auto-parts stores with a lot of additional business.

“These stocks run up together and come down together,” said Melich, who has a “hold” rating on AutoZone (AZO) and Advance but a “sell” on O’Reilly. “O’Reilly in our view is the best of the three leading companies in terms of return and long-term growth, but it is also the most expensive stock.”

Changing trends can also play into the hands of these companies.

“With gasoline prices ramping up now, you’re going to see these companies sell products that will help improve fuel efficiency,” said David Schick, analyst with Stifel Nicolaus and Co. in Baltimore. “Whatever the economy throws at them, they know how to adapt to it.”

The biggest growth driver for the companies is the fact that they have a good distribution model for getting parts to small- and mid-size shops, which makes their store network a distribution network as well, he added.

“While I can see where we can eventually get to the point of putting a buy rating on AutoZone, O’Reilly and Advance, for now I’ve got them hold-rated,” said Schick, noting that their stock prices have slipped coming off last year’s dynamic increase and may become even more attractive.

AutoZone, with nearly 4,500 stores in the U.S. and more than 200 stores in Mexico, also sells ALLDATA automotive diagnostic and repair software. Its market in Mexico is particularly attractive from a long-term viewpoint. William Rhodes III, CEO since 2005 and chairman of the board of directors since 2007, has been with the company for more than a decade. Despite carrying considerable debt, AutoZone is in good financial shape.

Auto-parts and accessories companies tend to be cyclical, face strong competition and can feel pressure from increased new car sales. But, unlike so many American businesses that faded quietly away into obscurity, their long-term viability appears secure.

Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, Ariz. 85004-1248, or by e-mail at andrewinv@aol.com.

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