Auto Parts Stocks Shift Gears: Which is the Right One to Buy?

Key Points

• Advance Auto Parts names a new CEO, but it may not be enough to get the stock moving soon. 
• Autozone is outperforming its competitor, and robust repurchases support the stock price. 
• O'Reilly Automotive is the leader of the pack based on some commonly accepted criteria. 

Auto parts stocks shifted gears this year, naming new CEOs to the 3 largest players. While O’Reilly Automotive NASDAQ: ORLY and Autozone NYSE: AZO chose to go the internal route to help ensure a smooth transition, Advance Auto Parts NYSE: AAP looked outside the company.

Given the recent downturn in outlook, this may be a good move, and the choice appears good. Advance Auto Parts named Shane O’Kelly to the position; Mr. O’Kelly served as CEO of HD Supply before the appointment. The question is which is better positioned to deliver results to shareholders now and in the future. 

Advance Auto Parts Booted from S&P 500 

Advance Auto Parts has had its share of problems over the past 2 years. A long story short, the company’s lean into dividends and dividend growth was cut drastically short and resulted in a dividend cut and, now, removal from the S&P 500. That situation sent shares into a downward spiral that has them down more than 70%, possibly heading lower. The new CEO could and probably will turn the company around; the question is when and what happens to the share price between now and then? 

The Q2 results were weak and lagged behind its peers. The $2.7 billion in revenue is up 1.1% and beat the consensus estimates but is far short of O’Reilly’s 10% and the 5%+ expected from AZO when it reports. The worst news in the report is that the margin contracted more than expected, leaving the earnings down compared to last year and double-digits below the Marketbeat.com consensus. 

The company raised guidance, which may be enough to put a bottom in the analysts' sentiment, but that is not in place yet. The analysts have been downgrading the stock and lowering price targets to place the stock high on the Most Downgraded and Lowest Rated Stocks list on the Marketbeat.com platform. The consensus price is about 45% above the action but trending lower. The most recent price targets are in a wide range, bracketing the current price point, suggesting fair value is near. 

Get in the Zone with Autozone

Autozone’s chart looks much better than Advance’s from the start. This chart shows volatility but a seasonal upswing in prices that could take it back to all-time highs soon. The upswing is bolstered by a recent $2 billion addition to the buyback program worth another 2.5% to shareholders.

Given its track record for share repurchases and growth outlook, Autozone doesn't need to pay a dividend to support its price action. The stock also offers some value relative to O’Reilly, which carries the highest valuation at 24X earnings. 

The analysts are more enthusiastic about Autozone and see it advancing. The 19 with current ratings have it pegged at a firm and steady Moderate Buy with a price target about 10% above the price action. The trend in the consensus target flattened over the last month but is rising and leading the market higher.

This trend should continue following the Q2 release, assuming the company’s report is closer in alignment with ORLY than AAP. O’Reilly and Autozone are still in the S&P 500 and will likely remain in their positions for the foreseeable future. 

O’Reilly is the Leader of the Pack 

If you base the decision on performance, analysts' sentiment, and the charts, then O’Reilly Automotive is the pack's leader. The company delivered +10% growth in Q2 and is expected to deliver a high-single-digit figure in Q3. The chart is very bullish, showing a solid uptrend ending in a Bull Flag/Rising Triangle pattern, suggesting a continuation is at hand. The analysts rate the stock a firm and steady Moderate Buy with a price target that, while only 3.5% above the current action, is trending robustly higher with high targets that suggest another 10%+ of upside is on the way.