The year 2021 presented a unique economic landscape, marked by supply chain disruptions, inflationary pressures, and ongoing volatility linked to the coronavirus pandemic. Amidst these challenges, the automotive parts industry demonstrated remarkable resilience and growth. Key players like AutoZone, Genuine Parts Company, and O’Reilly Automotive have not only weathered the storm but have significantly expanded their market share, capitalizing on economies of scale and evolving consumer behaviors. This article delves into the factors driving the success of Car Part Retailers and analyzes top stocks in this thriving sector.
The Thriving Automotive Aftermarket: Key Industry Drivers
The automotive aftermarket, encompassing car part retailers and related services, has proven to be a robust sector. In 2019, the U.S. automotive aftermarket was valued at an estimated $297 billion, according to the Auto Care Association. This substantial market is further segmented into do-it-for-me (DIFM) services ($207 billion), do-it-yourself (DIY) parts purchases ($58 billion), and tire sales ($32 billion). Several factors contribute to the fragmented yet dynamic nature of this industry:
- Vehicle Parc and Age: The increasing number and average age of vehicles on the road are primary growth catalysts. As vehicles age, the demand for replacement parts and maintenance services naturally rises. The average age of vehicles in the U.S. has reached a record high, currently exceeding 12 years.
- Miles Driven Annually: Consistent vehicle usage, measured by annual miles driven, directly impacts wear and tear, necessitating regular maintenance and parts replacement.
- Licensed Drivers: A growing number of licensed drivers translates to a larger potential customer base for both new and used vehicles, and subsequently, the aftermarket parts and services sector.
- Light Duty Vehicle Popularity: The surge in popularity of light-duty vehicles, including SUVs, pickup trucks, and crossovers, is particularly significant. These vehicles typically require more aftermarket product purchases compared to smaller passenger cars.
- Deferred Maintenance: A substantial amount of deferred or underperformed vehicle maintenance, estimated at $69 billion annually in the U.S. (according to the Automotive Aftermarket Suppliers Association – AASA), represents a considerable untapped market opportunity for car part retailers.
The coronavirus pandemic initially presented challenges, causing sales disruptions and supply chain bottlenecks in 2020. However, 2021 marked a period of strong recovery. Vehicle sales rebounded sharply in major markets like China, Europe, and the U.S., although U.S. light vehicle sales are still projected to remain below pre-pandemic levels due to inventory shortages and ongoing parts scarcity. Despite these headwinds, the increasing average vehicle age and consumer preference for maintaining existing vehicles over purchasing new ones have created a favorable environment for car part retailers.
Secular Trends Favoring Car Part Retailers
Beyond immediate economic factors, several long-term trends are bolstering the car part retail sector. The rising popularity of light-duty vehicles is a significant secular trend. In 2020, light-duty vehicles accounted for over 76% of new vehicle sales in the U.S., a considerable increase from just 51% in 2010. This shift towards larger vehicles directly benefits car part retailers, as these vehicles generally require more parts and maintenance over their lifespan compared to traditional passenger cars.
Furthermore, favorable macroeconomic conditions, including rebounding GDP, consumer stimulus measures, recovering employment rates, and historically low interest rates, are providing additional tailwinds for the automotive aftermarket. These factors support consumer spending and vehicle usage, driving demand for car parts and maintenance services. Record high price realizations and cost-cutting measures implemented in 2020 are also contributing to healthy profit margins for companies in this sector.
Top Car Part Retailer Stocks: An In-Depth Look
Given the positive industry outlook, investing in car part retailer stocks presents a compelling opportunity. To objectively assess the attractiveness of individual companies, the AAII (American Association of Individual Investors) A+ Stock Grades provide a valuable framework. This system evaluates companies based on five key factors: value, growth, momentum, earnings estimate revisions, and quality, all of which have historically been indicators of market-beating stock performance.
Let’s examine three leading car part retailers – AutoZone (AZO), Genuine Parts Company (GPC), and O’Reilly Automotive (ORLY) – through the lens of AAII’s A+ Stock Grades.
AutoZone (AZO): Dominance in the DIY Market
AutoZone stands out as the preeminent retailer of aftermarket automotive parts and accessories, primarily serving DIY customers in the U.S. While the company is expanding its commercial customer base, its DIY segment remains dominant, accounting for approximately 75% of domestic sales. AutoZone also has a growing international presence in Mexico and Brazil, operating a total of 6,767 stores across these regions as of fiscal year 2021. AutoZone’s product range covers parts for cars, SUVs, vans, and light trucks, including both new and remanufactured components, maintenance items, and accessories. The company also offers AllData brand diagnostic and repair software and operates e-commerce platforms like AutoZone.com and AutoZonePro.com for commercial clients.
According to AAII Stock Grades, AutoZone exhibits a Value Grade of B, indicating a value-oriented stock based on metrics like price-to-free-cash-flow, shareholder yield, and enterprise-value-to-EBITDA ratio. AutoZone shines in Momentum, receiving an A Grade, reflecting its strong relative price performance over the past four quarters. The company holds an average Growth Grade of C and does not currently offer a dividend.
Genuine Parts Company (GPC): Diversification and Quality
Genuine Parts Company (GPC) operates through two main segments: automotive parts (approximately two-thirds of net sales) and industrial parts. Its automotive division distributes replacement parts for virtually all vehicle makes and models to both commercial and retail customers through around 9,800 stores globally, primarily under the NAPA Auto Parts brand. The industrial segment, operating mainly as Motion Industries in the U.S., provides industrial components to maintenance, repair, and OEM clients.
GPC distinguishes itself with a Quality Grade of A from AAII. This high-quality designation is based on factors like return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, and other financial health indicators. The company demonstrates particularly strong performance in F-score and buyback yield. Genuine Parts holds a Momentum Grade of B and a Growth Grade of D. It offers a dividend, currently yielding around 2.5%.
O’Reilly Automotive (ORLY): Balanced DIY and Professional Approach
O’Reilly Automotive is a major player in the aftermarket auto parts retail space, serving both professional service providers (41% of 2020 sales) and DIY customers (59%). The company offers a mix of branded and private-label products, with private labels accounting for almost half of sales. O’Reilly’s product line encompasses a comprehensive range of parts, maintenance items, and accessories. The company also provides value-added services like battery testing, tool rentals, and recycling programs. As of the end of 2020, O’Reilly Automotive operated over 5,600 stores across 47 U.S. states and Mexico.
O’Reilly Automotive achieves a Growth Grade of C from AAII, considering both short-term and long-term growth in revenue, earnings per share, and operating cash flow. The company has demonstrated consistent revenue and earnings growth. O’Reilly also receives a positive Earnings Estimate Revisions Grade of B, reflecting analysts’ positive outlook. The company exhibits a Momentum Grade of B and an average Value Grade of C. O’Reilly Automotive does not currently pay a dividend.
Conclusion: Resilience and Opportunity in Car Part Retail
The automotive part retail sector has proven its resilience in a challenging economic environment. Driven by fundamental factors such as the increasing age of vehicles, the growing popularity of light-duty trucks and SUVs, and consistent demand for vehicle maintenance, car part retailers are well-positioned for continued success. Companies like AutoZone, Genuine Parts Company, and O’Reilly Automotive, with their established market presence and strong financial profiles, represent compelling investment opportunities within this robust industry. By utilizing objective frameworks like the AAII A+ Stock Grades, investors can gain valuable insights into the strengths and potential of these leading car part retailers.
Disclaimer: This analysis is for informational purposes only and does not constitute investment advice. Always conduct thorough due diligence before making any investment decisions.
