Have you invested in an aftermarket auto parts retailer yet? Now might be a good time. Allow me to explain myself: auto parts suppliers experienced a very profitable year in 2013. Many aftermarket retailers have actually beaten the market, and there’s a good reason why; people have been holding on to their vehicles for a longer period of time than they ever have before. In the past five years there has actually been a 20% increase in the number of vehicles older than 12 years. Also for 2013, the average age of “light” vehicles in the U.S. reached a higher-than-ever 11.4 years old
This is actually a huge industry, with statistics from the Automotive Aftermarket Industry Association showing the U.S. automotive aftermarket stands at about $231.2 billion in 2012. The Automotive Aftermarket Suppliers Association also estimated that there are roughly $66 billion per year worth of unperformed maintenance by U.S. vehicle owners.
This particular industry, however, is amidst change in structure as more opportunity is sought in the commercial “do it for me” rather than the “I’ll do it myself” market. This may be caused by the advanced technology and complex nature of today’s vehicles.
Several companies are taking advantage of both markets. One of these companies is AutoZone (AZO). AutoZone offers everyday low prices, and does its best to be the price leader in most areas. In addition to targeting the “I’ll do it myself” customer, the company also has a commercial sales program in the United States which offers delivery of parts and products, as well as commercial credit, to various garages and dealers, among others. AutoZone stores generally hold more than 20,000 stock units at any given time. The company does not actually perform repairs or installations itself.
AutoZone’s aggressive moves into the commercial arena definitely have the potential to improve business even further. The company opened the commercial program in 125 stores last quarter, which is greatly above the 37 opened last year. Because of this, sales related to commercial business increased almost 14% from last year. Going forward, the company is planning to improve on the commercial parts stock that is held at its hub locations, in addition to increasing inventory at its distribution centers.
There is one major concern about the company that completely turns me off, and makes me think that there are more viable options out there: debt. AutoZone has roughly $4.3 billion in current liabilities, with only $1 billion in free cash flow (TTM). Total liabilities for the company are nearly at $9 billion.
The other problem is the way that the company is choosing the handle the situation. For whatever reason, AutoZone thinks that it is a better idea to repurchase its own shares rather than pay down their debt. The company actually boosted its share repurchase program by $750 million.
At this point, Advance Auto Parts (AAP), or even O’Reilly Automotive (ORLY), may be a better option. Thoughts?
End Notes
Disclosure: No current position held at the time of writing.
Disclaimer: The opinions and ideas in this article are for informational and educational purposes only. They are not a recommendation to buy or sell any stock at any given time. As always, it is imperative for each individual investor to do their own due diligence and perform their own research on any and all stocks before making an investment decision.
