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2 Surging Auto Parts Stocks with More Room to Run

Despite lingering supply chain disruptions, the automotive parts industry is expected to grow significantly in the coming months on strong global demand. Thus, we think it could be wise to invest in fundamentally solid auto parts stocks AutoZone (AZO) and O’Reilly (ORLY), which have great upside potential. Read on.

The ongoing geopolitical crisis caused by Russia’s invasion of Ukraine has aggravated existing supply chain disruptions. However, the strong demand for auto parts alongside technological developments in manufacturing processes are driving the growth of the auto parts sector in the United States.

The automotive aftermarket industry is projected to hit $855 billion by 2028, growing at a 6.4% CAGR. The strong demand for hybrid and electric vehicles amid soaring crude oil prices, and the emergence of 3D printing in the automotive aftermarket industry, are further boosting the market’s growth.

Given the industry’s impressive growth prospects, we think it could be profitable to invest in quality auto parts stocks AutoZone, Inc. (AZO) and O’Reilly Automotive, Inc. (ORLY). These names are expected to rally further in the near term.

AutoZone, Inc. (AZO)

AZO in Memphis, Tenn., is the leading retailer and distributor of automotive replacement parts and accessories. The company provides a wide range of products for cars, sport utility vehicles, vans, and light trucks. Its products include A/C compressors, batteries, accessories, calipers, engines, fuel pumps, lightning products, radiators, and water pumps. AZO operates more than 6,066 stores in the U.S., 666 stores in Mexico, and 53 stores in Brazil.

On March 29, AZO and Lectron, a leading electric vehicle (EV) charging brand, entered a retail partnership to make EV  charging more accessible to consumers. AZO carries a wide range of Lectron products on its website, including chargers, charging stations, and adaptors. This partnership is expected to boost the company’s revenue streams.

On March 22, AZO announced the repurchase of an additional $2 billion of the company’s common stock. “AutoZone’s continued strong financial performance allows us to grow our business, return meaningful amounts of cash to our shareholders and maintain our investment-grade credit ratings. We remain committed to our disciplined capital allocation policy to drive growth and enhance shareholder returns while maintaining adequate liquidity,” said Jamere Jackson, CFO and Executive Vice President – Finance and Store Department.

AZO's net sales increased 15.8% year-over-year to $3.37 billion in its fiscal 2022 second quarter, ended Feb. 12, 2022. Its gross profit grew 14.5% year-over-year to $1.79 billion. The company’s operating profit (EBIT) improved 30.1% year-over-year to $626.76 million. Its  net income and net income per share came in at $471.76 million and $22.30, respectively, registering an increase of 36.4% and 49.4% from the prior-year period.

Analysts expect AZO's revenue for its fiscal 2022 third quarter, ending May 31, 2022, to come in at $3.69 billion, representing a marginal rise year-over-year. The company has an impressive earnings surprise history; it has surpassed the consensus EPS estimates in each of the trailing four quarters.

The stock has gained 17.2% in price over the past three months and 50.6% over the past year. AZO closed Friday's trading session at $2,190.56.

AZO's POWR Ratings reflect this promising outlook. It has an overall B grade, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

AZO has a grade of A for Quality and B for Sentiment. Within the Auto Parts industry, it is ranked #10 of 69 stocks.

To see additional POWR Ratings (Stability, Value, Growth, and Momentum) for AZO, click here.

O’Reilly Automotive, Inc. (ORLY)

ORLY operates as a retailer and supplier of automotive aftermarket parts, supplies, tools, equipment, and accessories in the U.S. The company offers new and remanufactured automotive hard parts and maintenance items, auto body paint and related materials, and automotive tools and provides enhanced services and programs. ORLY owns and operates 5,759 stores in the U.S. and 25 stores in Mexico.

In the fiscal 2021 fourth quarter, ended Dec. 31, 2021, ORLY's sales increased 16.4% year-over-year to $3.29 billion. Its gross profit grew 17.8% year-over-year to $1.73 billion. ORLY’s operating income improved 26.5% from the prior-year period to $675.88 million. And the company’s net income rose 32.1% year-over-year to $518.97 million. ORLY’s earnings per share rose 41.5% year-over-year to $7.64.

The $3.31 billion consensus revenue estimate for its fiscal year 2022 first quarter ended March 31, 2022, represents a 7.1% growth from the same period in 2021. The $7.39 consensus EPS estimate for the to-be-reported quarter indicates a 4.7% year-over-year rise. ORLY has surpassed the consensus EPS estimates in each of the trailing four quarters.

Shares of ORLY have increased 9.1% in price over the past three months and 41.8% over the past year. They closed Friday's trading session at $736.47.

ORLY's strong fundamentals are reflected in its POWR Ratings. The stock has an overall grade of B, which translates to Buy in our proprietary rating system.

ORLY has an A grade for Quality and B for Sentiment. Within the Auto Parts industry, it is ranked #4 of 69 stocks.

To see additional POWR Ratings (Growth, Value, Momentum, and Stability) for ORLY, click here.

AZO shares were trading at $2,162.64 per share on Monday afternoon, down $27.92 (-1.27%). Year-to-date, AZO has gained 3.16%, versus a -6.68% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.


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