A business owner out there has been worried about the FED rate hikes and fearful talks of recession throughout 2023. It seemed like the whole economy was against this person's hopes and dreams to expand a business forward; suddenly, the FED took a dovish view for 2024 with potentially 6 rate cuts ahead; what do you think this person does first?
Well, one of the first things would be to start hiring new staff because the next step is to build inventory (which needs to be stocked and processed) because a more flexible monetary policy from the FED could quickly turn into a wave of new orders ahead for this business.
If that makes sense to you, then it would make sense why companies like O'Reilly Automotive (NASDAQ: ORLY), AutoZone (NYSE: AZO), and Advance Auto Parts (NYSE: AAP) are set to go on another bull run ahead. Why? Read the previous two paragraphs because that is precisely what's happening now.
Piecing it together
Following the employment situation reports for the last month, which is better known as the NFP (non-farm payrolls), yeah, the one that retail traders are scared to operate around since it typically makes markets volatile. The past month added 199 thousand jobs to the United States economy, but what does that mean?
It's not necessarily about how many jobs were added but how many went to a specific industry or pocket of the economy. And because MarketBeat serves savvy investors like yourself, the homework has been done to point you in the right direction.
The motor vehicles and parts industry added 30 thousand jobs in the past month, which represents 15.0% of the total jobs added. Compared to most industries out there, this is a big chunk, and there must be a reason behind this trend, remember the hypothetical business owner from earlier?
Well, now that rates are set to decline in 2024, and consumers will likely be going out to finance vehicles they've been waiting to buy, it makes sense that the first stop they (or dealers) make is stocking up on necessary parts to get the vehicles up to selling condition.
It's good to know that the space does provide you with a spoil for choice between value and momentum plays, all relying on the same fundamental factor of economic growth and pending rises in business activity.
Triple check
Based on analyst projections for the next twelve months, the automotive parts industry is set to grow its earnings per share by an average of 14.6%. Knowing what you know now, you can use this benchmark rate to pick the right stocks that can promise to bring you above-average growth, like these:
Advance Auto Parts has analysts sitting comfortably on a 159.7% projected advance in EPS for the next year; why? Go back to the jobs dynamic calling for new staff in these types of businesses.
Now, it should come as no surprise to you that these same analysts see a price target of $79.5 a share for the stock; by the way, that's 31.2% higher than today's price!
Considering that stock trades at 38.0% of its 52-week high prices, it should now be clear that Advance Auto Parts is the value pick of this list. Now, where does AutoZone stand in this group?
With a price target of $2,851 a share, there is only a 9.0% upside from today's prices. However, the real hidden upside lies in where the market values the next twelve months of earnings for the stock, the forward P/E.
With a 16.7x multiple, this stock is valued at a 30.4% premium to the industry's average 12.8x valuation. Like any product or service, the market will be willing to pay a higher price for those with a higher quality perception. With AutoZone, this premium valuation tells you that markets love it for a reason.
O'Reilly will take the crown of valuation at a 23.3x forward P/E, calling for an 82.0% premium over the industry's value. Considering that the stock trades at 98.0% of its 52-week highs like AutoZone's, those names take the share of bullish momentum picks in the list.
If you like to get a bargain price, Advance Auto Parts is the name for you. Still, if momentum is something you typically count on, then the latter two firms could be what your portfolio needs this quarter.
