“Get in the zone.”

We all know AutoZone’s (AZO) commercial catchphrase just as much as we know McDonald’s (MCD) “I’m lovin’ it” or Capital One’s (COF) “What’s in your wallet?”

These businesses are iconic: a part of American culture. Who doesn’t drive past an AutoZone – or an Advance Auto Parts (AAP) or O’Reilly Automotive (ORLY) – on at least a semi-regular basis? That might even be true if you live in Canada, Mexico, or Brazil.

And if we’re talking about Genuine Parts (GPC), which owns the NAPA brand, it’s actually in 17 countries. Along with the entire North American continent, it has locations in various European countries, as well as Australia and New Zealand.

All told:

• Advance Auto has more than 4,700 locations

• O’Reilly has more than 6,200 locations

• AutoZone has more than 7,100 locations

• Genuine Parts has more than 10,700 locations

Clearly, then, there’s a market for automotive parts and accessories. But you’re excused if you never really thought about how much money the industry makes every year.

It’s easy to take these stores for granted.

Easy but unfortunate considering the news that just broke this week.

According to market research and advisory firm Technavio, the global auto parts market – which is currently valued at $454.7 billion – is set to grow by another $354.9 billion by 2028.

What you have to realize is that cars and trucks aren’t simple creations anymore. They’re barely even cars and trucks.

They’re vehicular computers that are costing more and more money to make and maintain. Almost everything about them is digitized these days, from navigation systems to brakes and braking systems to engines and safety equipment.

It all adds up to big bucks. If you know something about the industry.

Which, fortunately, I do.

Inspecting Advance Auto Parts

Back before there was an auto parts shop on every single street, I was helping them get there.

As a commercial real estate developer for more than two decades, I built store after store after store for O’Reilly and Advance Auto Parts. They were in expansion mode during the ’80s, ’90s, and early 2000s. And I was all on board with that game plan…

Right up until the market crash of 2008 set their strategies on the back burner and my business went up in flames.

I’ve continued to follow the industry closely though. So you’d better believe I noticed the news about how much the industry is going to grow.

However, I also know those profits won’t be evenly spread.

Some of the four publicly traded chains I mentioned above are going to do much better than others. So if you want to invest in the larger industry’s upcoming profit surge, you need to first know about the players involved.

Let’s start with Advance Auto Parts with its 4,781 stores. It wasn’t doing so good just a year or two ago – ever since it purchased WorldPac in 2014, then failed to integrate the chain into its operations.

But it’s showing signs of becoming quite the turnaround story these days thanks to its new president and CEO, Shane O’Kelly, who joined in 2023.

O’Kelly sold off WorldPac and is now seeking to exit the West Coat market altogether. Under his leadership, Advance Auto is also reducing its distribution center count and expanding its operating margins.

Sales in 2024 have, admittedly, been pressured by unfavorable weather, including all those hurricanes we experienced a few months ago. And broader economic headwinds have hit it as well.

Investors should also understand that Advance Auto has a poor dividend history. And its earnings have been just as spotty.

As a result, shares are cheap, trading at 14 times Wall Street’s fiscal year 2026 estimates. And, again, they do have the potential to rise under O’Kelly’s leadership.

However, my team and I remain cautious here until we see better evidence that he can really get the job done.

A Well-Respected Auto Parts Company With Equally Respected Shares

AutoZone is up next with its 6,461 stores, and it’s under new management, too. Its previous president and CEO, Bill Rhodes, retired at the end of 2023, and Phil Daniele is in charge now.

So far, he’s holding up Rhodes’ legacy quite well. Shares continue to rise to new heights under his watch, with AZO hitting $3,000 for the first time ever.

The company already has a strong history of disciplined risk management and capital allocation, with a BBB credit rating. And, as the following chart shows, it’s increased its earnings every year for a 17% compound annual growth rate over the last two decades.

You can also see that it’s expected to continue climbing in the next two years.

In short, AutoZone’s fundamentals are worth talking about. But its shares aren’t trading with any margin of safety, so I can’t recommend it at this time.

If you want to put it on your watchlist, however, and wait for a good pullback, I won’t blame you one bit.

O… O… O’Reilly Has Another Solid Auto Parts Business

Then we have O’Reilly Automotive. Founded in 1957 by a family of that name, the company went public in 1993.

It’s been quite the success story ever since.

Similar to AutoZone, O’Reilly has a strong balance sheet with a BBB rating. This includes low leverage with an adjusted debt-to-EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs) ratio of 1.96 times.

It should come as no surprise then that ORLY boasts consistent earnings and best-in-class growth of 20% over the last 20 years.

However, also like AutoZone, shares are expensive, trading at 31.1 price-to-earnings. So once again, I would wait for a pullback before buying this auto parts beauty.

Genuine Parts Is the Real Dividend Deal

Last but certainly not least, let’s look at the behemoth that is Genuine Parts. Founded in 1928 with a 1968 IPO, its legacy NAPA brand will celebrate its 100th anniversary next year.

Genuine Parts is a pinnacle of financial strength both in terms of its cash flow and its A-rated balance sheet that blows its competitors out of the park. Its total debt level sits at just $4.6 billion compared to its $20.3 billion in total assets. And its total debt to adjusted EBITDA is 2.2 times.

Moreover, this company is a dividend king and then some. It’s long since surpassed the 50-year mark for raising its dividend on an annual basis.

Genuine Parts has done that for 68 years now.

Its earnings per share, admittedly, has fluctuated a bit more over the past 20 years. And it’s probably going to continue to do so for the next two.

However, that’s helping its shares trade on the cheap at 14.5 times price-to-earnings compared to a normal valuation of 18 times. For all those reasons, I’m calling this big guy a buy.

Check it out and let me know if you say the same.

Regards,

Brad Thomas
Editor, Wide Moat Daily

MAILBAG

Do you agree with Brad on his opinion about investing in some auto parts companies? Write us at feedback@widemoatresearch.com.