After a long and harsh spell of winter, US investors can find solace in spring which holds nothing less than a solid promise for some retailers. Auto parts retailers such as AutoZone, Inc. (NYSE:AZO), O’Reilly Automotive Inc (NASDAQ:ORLY), and The Pep Boys – Manny, Moe & Jack (NYSE:PBY) are finding it better in spring with better than expected earnings.
AutoZone (AZO) Smashed Earnings Expectations
AutoZone, Inc. (NYSE:AZO) smashed earnings expectations for the latest quarter. The company recorded their 27th consecutive quarter of double digit growth in earnings per share (EPS) by registering a 6.8 percent jump in net profit to $17 million. Double digit EPS growth was made possible by its share repurchase program under which AutoZone bought back 833,000 shares during the quarter. Growth in both net income and EPS was driven by a 4.5 percent jump in revenues to $2.2 billion for the quarter ended May 4, 2013.
This is on expected lines as the company earlier projected faster growth in the second half of the financial year as a severe winter was expected to drive up auto repairs. This was exactly opposite of the scenario we saw last year when warmer than usual winter caused less repairs. The stock currently trades at a trailing 12 months price earnings ratio of 17.1 and looks attractive at a forward multiple of 13.75.
Ways to play the bullish sentiment
The largest auto parts retailer in the US has beaten street expectations and it sends a strong signal about the fundamental strength in the sector. However, buying the stock is not going to yield good returns now and investors need to think beyond the market leader. O’Reilly Automotive Inc (NASDAQ:ORLY) offers a way to play this bullishness. The company will be out with its second quarter results in July and is likely to follow what we saw with AutoZone, Inc. (NYSE:AZO). O’Reilly Automotive trades at a price earnings ratio of 22.6 which is a bit above AutoZone but that is due to stronger fundamentals.
O’Reilly Automotive has a debt equity ratio of only 0.53 compared to negative equity in case of AutoZone. A far more important factor is that the company is likely to continue posting better results which is reflected in its forward price earnings ratio of 17. The company expanded its operating and net profit margin during the first quarter – a trend which may very well extend to the second quarter due to its efficient capital structure.
Another way may be to go long in The Pep Boys – Manny, Moe & Jack (NYSE:PBY) – a company whose stores cater to both do-it-for-me and do-it-yourself customers. Fresh after a recent correction, the stock has enough momentum to its side to scale new heights. Unlike AutoZone, Inc. (NYSE:AZO) and O’Reilly, it is yet to come up with its financial results for the first quarter. The stock is on a rebounding trail after AutoZone’s bullish results and looks set to make the most of the opportunity. Even though the company has a less profitable operating structure, there is a hope of interest costs coming down due to recent debt restructuring.
At the same time, the management is following a customer focused strategy which is yet to reflect in its results. All things put together, PBY appears to be a dark horse which has enough scope of a turnaround. It may be risky compared to its peers but conditions are just right for a financial turnaround. At a forward price earnings ratio of 17.2 and a debt equity ratio of 0.37, PBY appears to be a worthy bet.
Overall, the bullishness in the sector is not devoid of a reason and there are good chances of the earnings growth extending in the second quarter results as well.
