O'Reilly Automotive vs. AutoZone: Which Auto Parts Stock is a Better Buy?

O'Reilly Automotive, Inc. (ORLY) in Springfield, Mo., and AutoZone, Inc. (AZO) in Memphis, Tenn., are two popular players in the Auto Parts industry. ORLY is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories. The company sells new and remanufactured automotive hard parts, maintenance items, and other accessories to do-it-yourself (DIY) and professional service providers. AZO is a specialty retailer and distributor of automotive replacement parts and accessories. Its stores offer product lines for cars, sport utility vehicles, vans, and light trucks.

As the global semiconductor chip shortage forces companies to delay their new-vehicle production, prices of new cars are on the rise. Given this backdrop, people are either buying used vehicles or repairing their existing vehicles and the aftermarket auto parts industry is witnessing solid demand. According to a Reportlinker.com report, the global automotive aftermarket industry is expected to grow at a 3.6% CAGR to $562 Billion by 2027. Thus, both ORLY and AZO should benefit from the industry tailwinds.

While AZO gained 5.8% over the past three months, ORLY surged 13.3%. In terms of the past six months’ performance, ORLY is a clear winner with 30.3% gains versus AZO’s 29.2% returns. But, which of these stocks is a better pick now? Let’s find out.

Click here to check out our Automotive Industry Report for 2021

Latest Movements

This month, ORLY opened a new store in Durango and one at Stephens City. Both  stores will celebrate their grand opening through July 27. ORLY is seeking to  capitalize on the rising demand for auto parts and set its footprint across the country.

On May 27, 2021, Unique Logistics International, Inc., a global logistics and freight forwarding company, announced a 12-month ocean freight contract with AZO to serve as its ocean transport and logistics provider from the Asia-Pacific region to North America. Due to the large number of products imported to the U.S. annually, being UNQL’s customer will be helpful because  auto parts’ delivery will be an important  focus for AZO.

Recent Financial Results

ORLY’s net sales for its fiscal first quarter ended March 31, 2021, came in at $3.09 billion, representing a 24.8% year-over-year improvement. The company’s gross profit increased 26.6% year-over-year to $1.64 billion. Its operating income is reported at $691.11 million for the quarter, up 63.2% from the prior-year period. While its net income increased 67% year-over-year to $501.61 million, its EPS increased 77.8% year-over-year to $7.06. As of March 31, 2021, the company had $610.88 million in cash and cash equivalents.

For its fiscal third quarter, ended May 8, 2021, AZO’s net sales increased 31.4% year-over-year to $3.65 billion. The company’s gross profit came in at $1.91 billion, up 28.5% from the prior-year period. Its income from operations has been reported at $803.51 million for the quarter, representing a 63.4% year-over-year improvement. AZO’s net income increased 73.9% year-over-year to $596.16 million. Its EPS increased 84% year-over-year to $26.48. The company had $975.65 in cash and cash equivalents  as of May 8, 2021.

Past and Expected Financial Performance

ORLY's revenue and net income have grown at CAGRs of 10.3% and 18.5%, respectively, over the past three years. The company’s EPS has increased at a 25.6% CAGR over the past three years.

Analysts expect ORLY’s revenue to decrease 3.2% year-over-year in the current quarter (ending September 30, 2021), but increase 5.3% in the current year, and 3.9% next year. Its EPS is expected to decrease 6.4% in the current quarter but increase 11.6% in the current year and 6.4% next year. The stock’s EPS is expected to grow at a 12.4% rate per annum over the next five years.

In comparison, AZO’s revenue and net income have grown at CAGRs of 8.5% and 15.7%, respectively, over the past three years. The company’s EPS grew at a 22.8% CAGR over the past three years.

Analysts expect AZO’s revenue to decrease marginally year-over-year in the current quarter (ending August 31, 2021) but increase 12.8% in the current year and marginally next year. Its EPS is expected to decrease 4.6% in the current quarter and increase 24.1% in the current year and 2.7% next year. Analysts expect the stock’s EPS to grow at a 10%rate per annum over the next five years.

Profitability

AZO’s trailing-12-month revenue is 1.2 times  ORLY’s. However, ORLY is more profitable with a 22% EBIT margin versus AZO’s 20.9%.

Also, ORLY’s net income margin and levered free cash flow margin of 16% and 18.9%, respectively, compare favorably with AZO’s 14.9% and 18.1%.

Valuation

In terms of non-GAAP forward P/E, ORLY is currently trading at 23.13x, which is 28.9% higher than AZO’s 17.95x.

Also, in terms of forward EV/Sales, ORLY’s 3.92x is 34.7% higher than AZO’s 2.91x.

POWR Ratings

While AZO has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, ORLY has an overall B grade, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

Both ORLY and AZO have been graded an A for Quality, which is in sync with their higher-than-industry profitability ratios. ORLY’s 22% trailing-12-month EBIT margin is 194.1% higher than the 7.5% industry average. AZO’s 20.9% trailing-12-month EBIT margin is 178.5% higher than the 7.5% industry average.

Both the stocks have a C grade for Value, which is consistent with their slightly higher-than-industry valuation ratios. ORLY’s 1.92x non-GAAP forward PEG value is 58.6% higher than the 1.21x industry average. AZO has a 1.53x non-GAAP forward PEG value, 26.4% higher than the 1.21x industry average.

Of the 65 stocks in the B-rated Auto Parts industry, AZO is ranked #30, while ORLY is ranked #25.

Beyond what we’ve stated above, our POWR Ratings system has also rated ORLY and AZO for Growth, Sentiment, Momentum, and Stability.

Get all AZO ratings here. Also, click here to see the additional POWR Ratings for ORLY.

The Winner

Both ORLY and AZO are well-positioned to benefit in the coming months, given their potential to benefit from industry tailwinds. However, relatively higher profit margins and expanded market reach make ORLY a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Auto Parts industry.

Click here to check out our Automotive Industry Report for 2021

ORLY shares were trading at $604.39 per share on Wednesday afternoon, down $2.99 (-0.49%). Year-to-date, ORLY has gained 33.55%, versus a 16.98% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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