Here’s Why The Auto Parts Sector Looks Attractive, And Here Are Three Potential Picks

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In 2021, one of the big stories for consumers was the global shortage of chips used in new vehicles. While the news may have died down a bit this year, the problem certainly hasn’t gone away. In fact, auto industry experts told Automotive News Canada toward the end of June that the shortage of new vehicles is likely to last “well into next year, if not 2024.”

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Two Trends That Support The Thesis For Auto Part Stocks

The issue has resulted in two trends, both of which support the thesis that auto parts stocks may be good buys right now. The first is that the prices for both new and used cars have skyrocketed over the last year. In June, Fortune reported that new vehicle prices had risen 12.6% year over year, while prices for used cars and trucks were up 16% since last year.

The other trend has resulted from that first trend. The higher vehicle prices are causing drivers to keep their cars for significantly longer than they otherwise would. As a result, the need for repairs and auto parts is much higher than it would be otherwise.

Further, the increasing likelihood of a recession will increase this need even more, making auto parts retailers a recession-resistant industry. After all, people in most suburban and rural markets still need to keep their vehicles in good working order so that they can get to work. Additionally, the average age of a vehicle on U.S. roads right now is about 12 years, a record high.

Some Of The Biggest Names In The Space

Investors need only look around their neighborhood for the names of some of the largest brick-and-mortar auto parts retailers. Of course, while some of these companies may be particularly attractive buys, they aren't all created equal. Some of the retailers with the largest footprints include Autozone Inc (NYSE:AZO) and O'Reilly Automotive Inc (NASDAQ:ORLY).

O'Reilly Automotive shares are up 2% year to date and 10% over the last month, with half of that gain coming in the last five trading days. Unfortunately, the company missed the consensus estimate for its second-quarter earnings per share, coming in at $8.78 per share and $3.7 billion in revenue, compared to the expected $8.99 per share. However, analysts have had plenty of good things to say about it.

One of the best things about AutoZone is its $1.5 billion share repurchase program. The company's stock is up 5% year to date, including about 1% over the last five trading days. AutoZone also posted strong beats against the consensus estimates for its third fiscal quarter. The retailer reported $29.03 per share in earnings on $3.9 billion in revenue, compared to the consensus numbers of $26.21 per share and $3.7 billion.

Don't Forget E-Commerce Retailers

Despite the strength of the above brick-and-mortar auto parts retailers, another company that shouldn't be dismissed is Carparts.com Inc (NASDAQ:PRTS), an online retailer of auto partners in the U.S. Given consumers' propensity for shopping online, an online retailer should be a strong option.

However, Carparts.com shares are down 23% year to date, even after the 28.5% rally over the last month, of which 15% has come during the last five trading days. The company did beat consensus estimates for the second quarter, posting earnings of 7 cents per share on $176.2 million in revenue. Analysts had been expecting losses of 3 cents per share on $175.8 million in revenue.

Overall, the auto parts sector looks robust due to current secular trends, so retailers would do well to check out the above names to see whether they might fit in their portfolio. Of course, analysis and due diligence are always necessities for every investor.