AutoZone (AZO) vs. Advance Auto Parts (AAP) vs. Modine Manufacturing Company (MOD): Which Is the Best Auto Stock Buy?

Despite prevailing macro headwinds, the auto parts industry is well-positioned to witness significant growth this year and beyond, thanks to steady demand for new and used automobiles, the rising popularity of vehicle customization and personalization, several technological advancements, and the introduction of e-commerce platforms.

Given the industry’s solid footing, investing in fundamentally sound auto stocks AutoZone, Inc. (AZO) and Modine Manufacturing Company (MOD) could be wise now. However, investors could hold Advance Auto Parts, Inc. (AAP) and wait for a better entry point in this stock.

According to the latest forecast released by Cox Automotive, the U.S. automotive industry’s solid year-over-year sales recovery continued in the third quarter of 2023, driven by pent-up demand and improved industry-wide inventory levels.

Despite higher interest rates on new-vehicle loans and a strike by the United Auto Workers against the major domestic automakers, sales volumes in September are expected to reach around 1.3 million, up more than 13% from a year ago. Also, sales volume in the third quarter is forecast to surpass 3.9 million, an increase of more than 15% over the same period a year earlier.

As the auto market enters the final quarter of 2023, the Cox Automotive Industry Insights team raised its full-year new-vehicle sales forecast to between 15.3 and 15.4 million units, an increase from the estimate of 15 million at the end of the first half.

The growing demand for new and used automobiles, the continued growth in aftermarket sales, and the rising demand for electric and hybrid vehicles are key factors propelling the auto parts industry’s growth. According to a report by Market Research Future, the global auto parts market is projected to reach $755 billion by 2026, growing at a CAGR of 7.5%.

In addition, the auto parts market’s growth prospects appear bright, driven by the increasing trend of automotive customization and personalization, like aesthetic look and performance upgrades, and several technological advancements, including navigation systems, advanced driver assistance systems, and infotainment systems.

The introduction of e-commerce platforms offering automotive parts and accessories is further expected to aid the industry’s profitability. The auto parts e-commerce aftermarket is expected to reach $183.31 billion by 2029, exhibiting a CAGR of 14.6% during the forecast period of 2023 to 2029.

With these favorable trends in mind, let’s take a look at the fundamentals of the three Auto Parts stocks, starting with number 3.

Stock to Hold:

Stock #3: Advance Auto Parts, Inc. (AAP)

AAP offers automotive replacement parts, accessories, batteries, and maintenance items for domestic and imported cars, vans, sport utility vehicles, and light and heavy-duty trucks. The company operates stores under the Advance Auto Parts, Autopart International, and Carquest brands and branches under the Worldpac name.

AAP updated its full-year 2023 guidance with a modest step up in net and comparable store sales growth, driven by the strengthening of its professional business. The company expects full-year net sales of $11.25-$11.35 billion, up from the prior guidance of $11.20-$11.30 billion. Its comparable store sales are anticipated to be between negative 0.5% to 0.5%.

However, the company reduced its outlook for operating income margin rate, EPS, and free cash flow. This reflects additional headwinds expected in the back half of the year driven by its ongoing commitment to maintaining competitive price targets, impacts from a shift in channel mix, and investments in its team to help retain top talent.

AAP anticipates fiscal year 2023 EPS of $4.50-5.10, down from the previous outlook of $6-$6.50. The company’s free cash flow is expected to be $150-$250 million, compared to the prior outlook of $200-$300 million.

AZO’s trailing-12-month gross profit margin of 43.60% is 23% higher than the 35.45% industry average. However, the stock’s trailing-12-month EBIT margin and net income margin of 5.11% and 3.08% are lower than the respective industry averages of 7.42% and 4.40%.

AAP’s net sales for the second quarter ended July 15, 2023, increased 0.8% year-over-year to $2.68 billion. However, its gross profit declined 3.2% from the year-ago value to $1.15 billion. Its operating income was $134.37 million, up 33.4% year-over-year. The company’s net income decreased 40.9% from the prior year’s quarter to $85.36 million.

In addition, the company reported earnings per common share of $1.43, a decline of 39.9% year-over-year. But its cash and cash equivalents stood at $277.06 million as of July 15, 2023, compared to $269.28 million as of December 31, 2022.

Analysts expect AAP’s revenue for the fiscal year (ending December 2023) to increase 0.9% year-over-year to $11.26 billion. However, the company’s EPS for the ongoing year is expected to decline 63.6% year-over-year to $4.75. Also, it missed the consensus EPS estimates in three of the trailing four quarters.

For the fiscal year 2024, the company’s revenue and EPS are estimated to increase 2.1% and 21.6% from the prior year to $11.49 billion and $5.77, respectively.

Shares of AAP have declined 15.5% over the past month and 52.2% over the past six months to close the last trading session at $54.82.

AAP’s POWR Ratings reflect its mixed prospects. The stock has an overall C rating, equating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

AAP has a B grade for Quality and Value. It has a C grade for Momentum. On the other hand, the stock has an F grade for Sentiment. It is ranked #49 out of 60 stocks in the A-rated Auto Parts industry.

Click here for the additional POWR Ratings for AAP (Stability and Growth).

Stocks to Buy:

Stock #2: AutoZone, Inc. (AZO)

AZO retails and distributes automotive replacement parts and accessories. The company provides various products for cars, sport utility vehicles, vans, and light trucks. Its products include A/C compressors, batteries and accessories, bearings, belts and hoses, calipers, chassis, clutches, CV axles, engines, fuel pumps, fuses, ignition and lighting products, mufflers, and radiators.

Under its share repurchase program, AZO repurchased 403 thousand shares of its common stock during the fourth quarter at an average price per share of $2.502, for a total investment of $1 billion. For fiscal year 2023, the company repurchased 1.5 million shares of its stock for a total investment of $3.7 billion. Share buybacks would enable AZO to generate additional shareholder value.

AZO’s trailing-12-month gross profit margin of 51.96% is 46.6% higher than the 35.45% industry average. Likewise, the stock’s trailing-12-month EBITDA margin and net income margin of 22.49% and 14.48% are significantly higher than the industry averages of 11.01 and 4.40%, respectively.

For the fourth quarter that ended August 26, 2023, AZO’s net sales increased 6.4% year-over-year to $5.69 billion, and its gross profit grew 8.8% from the year-ago value to $3 billion. Its operating profit rose 10.8% year-over-year to $1.22 billion. The company’s income before taxes grew 7.1% from the prior-year quarter to $1.11 billion.

Furthermore, the company’s net income rose 6.8% from the year-ago value to $864.84 million, and its net income per share came in at $46.46, an increase of 14.7% year-over-year.

Analysts expect AZO’s revenue for the fiscal 2024 first quarter (ending November 2023) to increase by 5.3% year-over-year to $4.19 billion. The consensus EPS estimate of $30.96 for the current quarter reflects a 12.8% year-over-year improvement. Moreover, the company has topped the consensus EPS estimates in all four trailing quarters, which is impressive.

Further, the company’s revenue and EPS for the fiscal year (ending August 2024) are expected to grow 7.3% and 12.8% year-over-year to $18.73 billion and $149.31, respectively.

Over the past six months, AZO’s stock has surged 7.3% to close the last trading session at $2,540.90. Also, the stock has gained 21% over the past year.

AZO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.

AZO has an A grade for Quality and a B for Sentiment. It is ranked #28 out of 60 stocks in the A-rated Auto Parts industry.

To access additional POWR Ratings of AZO for Momentum, Stability, Value, and Growth, click here.

Stock #1: Modine Manufacturing Company (MOD)

MOD offers engineered heat transfer systems and heat-transfer components for use in on- and off-highway original equipment manufacturer (OEM) vehicular applications. The company operates through the Climate Solutions and Performance Technologies segments.

On September 6, MOD signed a definitive agreement to sell three German-based Modine businesses located in Neuenkirchen, Pliezhausen, and Wackersdorf to affiliates of Regent LP. The sale of these businesses aligns with the company’s strategy to focus its resources on high-margin technologies with solid growth drivers.

On August 15, MOD launched a new electric infrared product line – the MEL Series. This high-wattage, commercial-grade electric infrared heater offers energy efficiency, fast heat-up times, and versatility for various applications, including outdoor patios and commercial spaces. This series is UL-certified for residential outdoor and commercial use, with input voltages ranging from 120V to 480V.

“The MEL Series provides our customers with a low-emissions heating product that can be used in a wide range of applications. We’re excited to add this new product to our growing line of electric heating solutions. Our team is committed to offering products that support Modine’s purpose of engineering a cleaner and healthier world,” said Jon Schlemmer, Vice President and General Manager of Heating Business at MOD.

In terms of the trailing-12-month EBIT margin, MOD’s 8.09% is 9% higher than the 7.42% industry average. Moreover, the stock’s trailing-12-month net income margin and ROCE of 7.72% and 34% are higher than the respective industry averages of 4.40% and 11.17%.

MOD’s net sales increased 15% year-over-year to $622.40 million for the second quarter that ended June 30, 2023. Its gross profit rose 53.4% year-over-year to $127.90 million. Its operating income rose 159.8% from the year-ago value to $66.50 million. The company’s adjusted EBITDA was $80.40 million, an increase of 90.5% year-over-year.

In addition, net earnings attributable to MOD grew 213.3% year-over-year to $44.80 million. The company’s adjusted earnings per share increased 165.6% from the prior year’s quarter to $0.85.

Analysts expect MOD’s revenue and EPS for the fiscal year (ending March 2024) to increase 9.2% and 48.1% year-over-year to $2.51 billion and $2.89. Additionally, the company has surpassed the consensus EPS estimates in each of the trailing four quarters.

The stock has gained 124.1% year-to-date and 234.4% over the past year to close the last trading session at $45.07.

MOD’s POWR Ratings reflect its robust outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

The stock has a B grade for Growth, Sentiment, and Quality. It is ranked #15 in the same industry.

In addition to the POWR Ratings I’ve just highlighted, you can see MOD’s ratings for Stability, Value, and Momentum here.

What To Do Next?

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AZO shares were unchanged in premarket trading Thursday. Year-to-date, AZO has gained 3.03%, versus a 12.64% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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