Auto Parts Stocks Looking Attractive

By Sham Gad | June 26, 2012 AAA

One of best retailing businesses - auto parts - is having a lackluster 2012 as a result of weak forecasts from the dominant players. This week O'Reilly Automotive (Nasdaq:ORLY), one of the three biggest auto parts retailers in the country, reported that its second quarter results would come in lower than previously forecasted. Shares fell 16% on the news and the news took the rest of the industry along for the ride.

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Quality Businesses
To say that auto parts retailers have been good investments over the past years is an understatement. Auto parts retailing stocks, led by giant AutoZone (NYSE:AZO) were part of a handful of stocks that vastly outperformed in 2008 when the S&P 500 fell by nearly 40%. AutoZone shares were up 10% in 2008 while O'Reilly declined by 10%, respectively. But patient investors have been duly rewarded. Since 2008 to the end of 2011, shares in AutoZone and O'Reilly are up by over 180 and 150%, respectively. The S&P is about the same. But it's been a mixed bag in 2012 for the industry. After O'Reilly's weakened forecast, AutoZone fell by nearly 5% while Advance Auto Parts (NYSE:AAP) fell nearly 10% before making most of it up. Suppliers like Dorman Products (Nasdaq:DORM) were spared the carnage but since Dorman sells to the retailers, it may ultimately feel the ripple from the weakness at the retail level. Dorman is a high quality business and shares have been on a sharp advance for some time now, and that can often warrant caution.

SEE: Earning Forecasts: A Primer

Recession Proof
Given the various sell-offs in these high quality stocks, long-term investors may find the industry an attractive idea source. Earlier this year, Advance Auto Parts also predicted a weaker second quarter and the market has treated shares very harshly. Its shares are down 5% year to date, vastly underperforming the S&P and its peer companies. Worries about the future state of the economy are a plus for auto parts retailers as they are often viewed as recession proof.

The Bottom Line
Weak economies keep people in older cars longer and older cars require more parts and repairs. While the short-term outlook may look uncertain, the long-term picture is much brighter. Over time, new cars age and that feeds into demand for auto parts. So if this is merely the start of a weak cycle for auto parts retailers, the cycle will eventually improve. More new cars today means more new older cars tomorrow. Auto parts retailers haven't sold off this much since 2008, and it's during these sell-offs that investors have made the best future returns.

SEE: 5 Must-Have Metrics For Value Investors

At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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