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2 Auto Repair Stocks Set to Race Ahead

By Chad Fraser on June 26, 2012

Summer vacation season is here, gas prices are falling, and many Americans are gearing up to hit the open road.

But before they do, a large number of them will have to get their cars fixed—especially in light of the fact that many are hanging on to older vehicles for longer than ever.

The age of the nation’s automobile fleet continues to creep up, mostly because the weak economy is keeping many drivers out of the dealerships. In 2011, the average car on American highways was 10.8 years old—a new all-time high.

Add it all up—older cars, summer vacations and lower gas prices—and you get big demand for immediate, and often costly, repairs. Here are two auto repair stocks that are poised to cash in as those old beaters sputter into the garage.

Auto Repair Stocks Can Provide Reliable Gains in Tough Times

AutoZone (NYSE: AZO) is one of the country’s biggest auto-parts chains, with 4,613 stores in the U.S. and 297 in Mexico, for a total of 4,910.

Because the company caters to independent mechanics and do-it-yourselfers, it has long been known as a go-to stock in hard times.

Investing Daily editor Jim Fink recently took a look at some of the top-performing stocks during the 2008/09 stock market crash and found AutoZone third on the list. While the rest of the market was in free-fall, the auto-parts chain soared 22%.

This Auto Repair Stock’s Selling More Car Parts Than Ever

More impressive is the stock’s performance since then: from March 9, 2009, to present, AutoZone has more than doubled, to its current level of around $377. But even with that big jump, it’s still reasonably priced compared to the competition, trading at 16.9 times its last 12 months of earnings.

Its profits, too, have remained impressive, rising 9.3% in the three months ended May 5, 2012, to $248.6 million from $227.4 million a year earlier. Earnings per share jumped 18.7%, to $6.28 from $5.29, on fewer shares outstanding. Sales were up 6.7%, to $2.11 billion. Domestic same-store sales (which exclude sales from new stores) rose 3.9%. 

Earnings were well ahead of the $6.23 a share that analysts were expecting, though sales fell just short of the forecast $2.13 billion.

Notably, sales of auto parts jumped 6.7%, to $2.07 billion. Profit margins edged up to 51.6% from 51.2%.

The company is pumping some of its rising profits into its ongoing expansion: in the latest quarter, its store count was up 3.8% from a year ago. It’s putting a good portion of the rest into its ongoing stock buyback program, which is helping boost its per-share profits even more. In the latest quarter, AutoZone spent $400 million to repurchase 1.1 million of its shares at an average price of $380 each.

This Toolmaker Has Carved Out a Unique Place Among Auto Repair Stocks

Snap-On (NYSE: SNA) is another company that’s benefiting from the rising age of North American cars.

The company’s main business is its Tools Group, which supplied 38% of its sales in the latest quarter. This business sells tools and services directly to auto mechanics through its 4,800 “mobile stores,” or franchisee-owned trucks, that regularly visit mechanics at their places of work.

Snap-On’s ubiquitous tool trucks have helped it claim a large share of the North American tool market; by going directly to mechanics, the company is able to offer an unparalleled level of convenience and a hands-on way to assess its clients’ needs. That’s something that’s tough for competitors who mainly sell through retailers, such as Stanley Black & Decker (NYSE: SWK), to match.

Broad-Based Business Sets Snap-On Apart From the Competition

Even though it’s mainly known for its tool trucks, Snap-On is much more than just a purveyor of wrenches and screwdrivers: it also supplies car-repair centers with computer diagnostic systems and repair information through its Repair Systems & Information Group (27% of sales), and serves other industries, such as aviation, agriculture and construction, through its Commercial & Industrial Group (35% of sales).

In the first quarter of 2012, the company’s overall sales rose 6% from a year ago, to $735.2 million. Earnings jumped 26.3%, to $71 million, or $1.21 a share, from $56 million, or $0.96 a share. Profits beat the Street’s forecast of $1.16 a share, while sales came in just under the $737 million that analysts were looking for.

Tool sales were a big part of Snap-On’s strong performance: in the quarter, auto mechanics bought $316.6 million of tools from the company, up 12.3% from a year ago. The Commercial & Industrial Group posted a 5.2% sales gain, while sales dipped 0.4% at the Repair Systems & Information Group.

The stock is more volatile than AutoZone, but it’s still up 17.6% so far this year. What’s more, Snap-On pays a regular dividend. Quarterly payments of $0.41 ($1.64 annually) yield 2.71%.

Tool demand will continue to rise with the age of the average North American car. That’s a long-term trend that should continue to push up Snap-On’s share price.

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