In the race to gain a competitive edge against the ever-broadening Amazon, auto-parts retailers are leveraging their advantage in personal service. Parts chains led by O'Reilly Automotive (ORLY), AutoZone (AZO) and Advance Auto Parts (AAP) offer their do-it-yourself (DIY) and commercial customers elements of value that are difficult for online rivals, including giant Amazon.com (AMZN), to duplicate: They can provide parts, advice and services in real time and on an as-needed basis.
Therein lies their edge over Amazon, says Northcoast Research analyst Nicholas Mitchell.
"The auto-parts retail world is nearly immune from the Amazon effect," Mitchell told IBD. "Auto parts are usually a need-based purchase in response to a failed part or a required maintenance item, which both need to be addressed sooner rather than later.
That makes consumers less willing to wait for delivery of an online order. And commercial installers need the parts as soon as possible in order to complete repairs and free up the bay, Mitchell said.
That bricks-and-mortar edge over Amazon, combined with other factors such as lower gas prices, has helped fuel the stocks in the auto parts group, which in the past eight weeks posted one of the 10 best gains among the 197 industry groups tracked by IBD.
"A lot of investors are looking for places where they can put their money to work and not have to worry about the long-term threat of Amazon," said Mitchell.
Overall, the group, which as of Friday ranked No. 29 among IBD's industry groups, has been turning out solid and steady financial gains.
A number of factors have been contributing to the group's performance. Among them are lower gasoline prices, a trend that has prompted people to drive more and put more wear and tear on their cars, sparking more demand for auto parts.
O'Reilly and AutoZone have been on a long-running winning streak with double-digit earnings growth. Analysts polled by Thomson Reuters expect double-digit quarterly profit gains from both AutoZone and O'Reilly through the end of 2017.
Advance Auto Parts is still digesting last year's roughly $2 billion acquisition of privately held General Parts International, a distributor that supplies original equipment and aftermarket replacement products to commercial markets under the Carquest and Worldpac brands.
The deal made Advance the largest automotive aftermarket parts provider in North America. Analysts expect a 9% rise in earnings for all of 2015 as the company integrates the buy.
But analysts see it picking up the pace with double-digit earnings growth in each quarter in 2016 and 2017.
More Miles Lead To Rising Sales
What's been driving the group's impressive performance
"We're seeing some of the best trends we've seen in years," Wedbush analyst Seth Basham told IBD.
"One of the most important statistics indicating the industry's health is the number of miles traveled by vehicles on U.S. roads," he said. "We're seeing growth in that metric in the 3% range year to date. That's the best trend we've seen since 2004.
An improved economy and lower gas prices are driving the trend, Basham adds. The more miles driven, the more likely that parts will break, which leads to more sales for the auto parts retailers, he says.
Gasoline prices continue to drop. The 2015 summer driving season ended with the national average gas price at its lowest point for the Labor Day holiday in more than a decade, according to an AAA report out Sept. 8.
Motorists paid an average price of $2.40 per gallon at the pump on Labor Day, a savings of $1.04 per gallon in comparison to last year's holiday. The national average price for regular unleaded gasoline has fallen for 22 consecutive days, reaching an average of $2.39 per gallon on Sept. 8, the report said.
"Prices are expected to continue to slide as driving demand experiences a seasonal decrease heading into the fall, provided the price of crude remains relatively low and refineries are able to conduct routine maintenance without issues," the report said.
The average age of cars continues to rise, also creating higher demand for replacement parts, maintenance and repair work.
The combined average age of all light vehicles on the road in the U.S. has risen slightly to 11.5 years, according to the most recent estimates from industry researcher IHS Automotive.
IHS forecasts that the average age is likely to hit 11.6 years in 2016 but not reach 11.7 years until 2018.
Deep Inventories = Big Barriers
Another positive driver for the group: "Cars are also becoming increasingly complex, which necessitates broad inventory across all categories," said analyst Ben Bienvenu of the financial services firm Stephens.
He cites the fact that O'Reilly and Advance have invested heavily in their inventories.
The requirement for such investment has created "big barriers to entry" into the space, he says.
"It normally requires a lot of cash flow to invest in inventory," he said, "and (the big players) have developed vendor finance programs in their accounts payable to fund their inventory cash flow requirements.
Bienvenu says that he's "very positive" on the space and has buy ratings on O'Reilly and AutoZone, and a hold on Advance.
In addition to lower gas prices and a brighter jobs picture, consistently good same-store sales performance and good expense controls supplemented by share repurchases have helped fuel AutoZone's and O'Reilly's stock price, he says.
Bienvenu adds that the big story for Advance is its acquisition of General Parts, which made the company larger and stronger. The acquisition also increased Advance's commercial business to about 57% of sales in 2014, compared to 40.4% in 2013, according to a company filing with the SEC.
"The reason that's important is when you look at where the industry's growth is coming from, it's in the do-it-for-me (commercial) business," said Bienvenu.
Basham says the reason why the do-it-for-me side of the business is growing faster than the do-it-yourself side is because of the "complexity" of new cars and the need for a professional garage to handle repair and maintenance.
The companies in the auto parts retailer space are "performing decently," he says.
"But the trend is that O'Reilly is executing extremely well and taking share from some of the larger guys and some of the smaller ones," he said.
O'Reilly "grew up" servicing commercial customers, he says. Its business has "shifted" over the years, he adds.
In 2014, O'Reilly derived about 58% of sales from its DIY customers and about 42% of sales from its professional service provider customers, according to a company filing with the SEC.
Its distribution is set up to "most effectively" serve commercial customers with features such as next-day delivery on parts.
"At all their stores, they're able to carry a large breadth of product with little depth," he said. "When you have breadth, you can more often say yes to commercial customers," he said.
"That's a key competitive advantage. They're staying ahead of the competition's ability to provide that level of service cost-efficiently. That's helping O'Reilly win on the commercial side.
Plenty Of Room For Growth
Basham says that Advance Auto Parts' results showed "incremental improvement, execution-wise" in the second quarter relative to the first quarter, when it hit a "speed bump." Only 20% of AutoZone's customers are commercial and the rest is DIY, he adds.
He says that because the company is "geared" more to the DIY customers, particularly those in the low- and middle-income brackets, it's the one in the space that has seen the biggest benefit from lower gas prices and the improvement in the jobs picture.
AutoZone is also investing more to grow its commercial business, he adds.
"AutoZone has a bigger opportunity than its peers to increase its commercial sales, since the per-store volumes are currently much lower than peers'," he said.
Bienvenu says that there is also plenty of room for growth. AutoZone, Advance and O'Reilly, he says, have around 15,000 stores in the U.S., which is only slightly more than 40% of the total. The remaining seven of the top 10 chains have only slightly more than 3,000 stores, he adds.
"There's a lot of opportunity for (AutoZone, O'Reilly and Advance) to continue to grow and take market share," he said.
J.D. Power & Associates and LMC Automotive project that new vehicle sales will grow 3.6% to 17.1 million units in 2015.
Basham adds that the rise in new car sales is not a "significant concern.
He adds: "The rate of new vehicle sales growth is slowing, which is an incremental positive near-term, indicating consumers are not upgrading to new vehicles at an accelerating pace and therefore spending to keep their cars on the road; the average age of vehicles continues to inch higher, despite a strong rebound in new car sales in recent years.
"If there's a concern as it relates to vehicle demographics, it's that there's a growing dearth of vehicles ages six to 10, which historically was considered prime repair time for auto aftermarket retailers.
"However, this has yet to become an issue as the prime repair time has extended, with vehicles lasting longer, meaning drivers are spending greater sums on older vehicles to keep them on the road, offsetting the slowdown in sales of parts for cars ending that six-to-10-year-old age range."
