This sleepy area becomes gangbusters, and nobody talks about it
Most investors have heard of hot coronavirus stocks before.
The “Stay at home” favorites like Focus on video communications and Interactive Platoon exploded this year on triple-digit revenue growth. Tech stocks have also crushed the market, especially in cloud computing and e-commerce. Same the powerful FAANG group has enjoyed tantalizing gains, pushing Apple to a market capitalization of $ 2,000 billion and Amazon over $ 1.6 trillion. Electric vehicle stocks, led by You’re here, also exploded.
However, the recovery may have already shifted. Shares peaked more than six weeks ago, with concerns about a fading labor market recovery and nervousness around the election could shake up the market even more. Investors may want to look beyond the top tech names to industries that have been mostly overlooked so far, and one area that looks set to take off is auto parts. Although the sector generally outperforms in times of recession, the auto parts inventory have delivered only average returns this year, mostly following the S&P 500.
As you can see, Advanced auto parts (NYSE: AAP), O’Reilly Automotive (NASDAQ: ORLY), and Automatic zone (NYSE: AZO) are actually all slightly behind the broad index, but these companies have already started to experience robust recoveries from the depths of the crisis.
Revenues have rebounded and these three companies have seen their profits increase by more than 30% in their last quarters, with Advance and O’Reilly recording gains of around 50%. Better yet, there are a number of signs their performance will only accelerate from there.
Auto parts retailers tend to thrive during recessions and their aftermath because they sell products that consumers need, not just what they want. Most Americans need a vehicle to get to work or do regular errands, and especially during economic downturns Americans tend to delay purchasing a new vehicle and focus on driving instead. maintenance and repairs, which means trips to the auto parts store.
However, this recession, sparked by a once-in-a-century pandemic, is also unique in that it has boosted demand for personal vehicles as Americans seek to avoid public transit and ride-sharing services for safety reasons.
Take the wheel
Overall auto sales have jumped during the pandemic. According to the Census Bureau, sales of motor vehicles and parts jumped 10.9% in September and 7.5% in the third quarter. The used car market has been the main driver of this growth.
Used car dealers love Carvana and Vroom were unable to meet demand, and both companies reported rising prices for used cars. Edmunds.com reported that August and September were the fastest months for used car inventory turns in six years.
These trends are expected to remain strong as a vaccine is at least months away and the need for personal vehicles does not change. Many auto parts companies are seeing similar trends.
AutoZone, which was the most recent of the group to report earnings, posted national comparable sales growth of 21.8% in its fiscal fourth quarter (ended Aug. 29). Adjusted earnings per share also increased 47.6% year-over-year. CEO William Rhodes appeared optimistic for the coming months on the earnings call, stating: “And if the economy enters an environment of deep and prolonged recession, we continue to believe that our customers will focus more on the maintenance of their current vehicles, and this will benefit our business, especially the trade of retail, as it has done in the past three recessions. ”From fiscal 2009 to fiscal 2011, same-store sales growth averaged 5.4%. Rhodes also noted that the August comps, which came after the improved unemployment benefits ended, showed strong growth at 16.5%, and he speculated that sales would remain high “for a while”.
In the second quarter, as the global economy collapsed, O’Reilly’s comparable sales rose 16.2% and earnings per share jumped 57%. The management of O’Reilly and Advance echoed Rhodes’ comments.
The price is right
Since these stocks are seeing double-digit comparable sales growth that trickles down to the bottom line, they look downright cheap. In fact, all three are trading at a discount to the S&P 500 based on their price-to-earnings ratios: 23.8 for Advance, 22.9 for O’Reilly and 16.6 for AutoZone. Meanwhile, the S&P 500 currently has a multiple of 35, which is high due to declining earnings in the first half of 2020.
Analysts’ estimates have risen for the industry, but they still seem to underestimate the tailwind of the pandemic and the economic downturn. At AutoZone, for example, the consensus estimate is only 4% growth in earnings per share for the fiscal year just started. Analysts expect a 21% gain at O’Reilly this year, but that number drops to just 2% in 2021. And Advance is actually expected to see stable earnings growth this year.
Keep in mind that these businesses typically experience increased demand during a typical recession, and the added impact of the pandemic means they are likely to experience record growth during this time, as we have seen. in their most recent reports, which crushed estimates. Census Bureau figures also show that momentum in the auto industry picked up in September, bodes well for parts sellers.
If these companies outperform again in their next reports, stocks should take off.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.