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

The outlook for the auto parts sector is positive. With a robust demand for both new and used cars, a growing trend towards vehicle customization, advanced technologies and an increase in ecommerce, it looks like the industry has a bright future. Let's see if AutoZone, Advance Auto Parts and Modine Manufacturing are good auto stocks to buy given the industry's tailwinds. Continue reading ....

The auto parts industry, despite macro-economic headwinds that persist, is poised to grow significantly this year and in the future, due to the steady demand for both new and used cars, the growing popularity of customization and personalization of vehicles, technological advances, and the introduction e-commerce platforms.

Considering the strong footing of the auto industry, it may be prudent to invest in AutoZone, Inc., (AZO), and Modine Manufacturing Company, (MOD), which are both fundamentally sound. Investors could, however, hold Advance Auto Parts, Inc. and wait for better entry points in this stock.

According to Cox Automotive's latest forecast, the U.S. auto industry continued its solid sales growth year-over-year in the third quarter 2023. This was due to pent-up consumer demand and an improvement in industry inventory levels.

Sales volumes are expected to increase by more than 13% in September despite higher interest rates for new vehicle loans and a United Auto Workers strike against major domestic automakers. Sales volume is also expected to exceed 3.9 million in the third quarter, a rise of over 15% from the same period last year.

The Cox Automotive Industry Insights Team has raised their full-year forecast for new vehicle sales to between 15,3 and 15,4 million units. This is an increase over the estimated 15 million units at the end the first half.

Key factors driving the growth of the auto parts industry include the growing demand for both new and used cars, the growth in the aftermarket, and the demand for hybrid and electric vehicles. Market Research Future's report projects that the global auto parts industry will reach $755 billion in 2026. This is a 7.5% CAGR.

The auto parts market is also expected to grow, thanks to the trend towards customization, personalization and technological advances, such as navigation systems, advanced drivers assistance systems and infotainment.

Further, the introduction of ecommerce platforms that offer automotive parts and accessories will help to boost profitability. The auto parts aftermarket e-commerce is forecast to reach $183.31 Billion by 2029. This represents a 14.6% CAGR during the forecast period from 2023 to 2029.

Let's start with the number 3 stock.

Stock to Hold

Stock # 3: Advance Auto Parts, Inc.

AAP provides automotive parts, accessories and batteries for import and domestic cars, vans and sport utility vehicles as well as light and heavy duty trucks. The company operates stores and branches under Advance Auto Parts and Autopart International brands, as well as Worldpac.

AAP has updated its guidance for the full year 2023. The company's professional business is a major factor in this update. The company now expects net sales to reach $11.25-11.35 billion for the full year, up from its previous guidance of $11.20-$11.30. The company expects its comparable store sales to range between a negative 0.5% and a 0.5%.

The company has reduced its forecast for the operating income margin, earnings per share (EPS) and free cash flow. The company expects additional headwinds in the second half of the year due to its commitment to maintain competitive price targets. It also expects to see the impact from a change in channel mix and its investments in its team in order to retain top talent.

AAP expects fiscal year 2020 EPS to be $4.50-5.10 down from previous expectations of $6-$6.50. Free cash flow for the company is expected to reach $150-$250 millions, down from an earlier outlook of $200 to $300 million.

AZO's 12-month trailing gross profit margin is 43.60%, which is 23% more than the industry average of 35.45%. The stock's EBIT margin (trailing-12-month) and net income margin (trailing-12 months) are both lower than industry averages (7.42% and 4.40%).

AAP's second-quarter net sales ended July 15, 2023 increased by 0.8% over the previous year to $2.68 Billion. Its gross profit, however, decreased 3.2% from its previous value of $1.15 billion. Operating income for the company was $134.37 millions, an increase of 33.4% over the previous year. The net income of the company decreased by 40.9% to $85.36 millions from the previous year's quarter.

The company also reported earnings per share of $1.43. This is a 39.9% decline from the previous year. Cash and cash equivalents were $277.06 millions as of July 15th 2023, up from $269.28 as of December 31st 2022.

Analysts predict that AAP's revenues for the current fiscal year (ending in December 2023) will increase by 0.9% over last year to $11.26 Billion. The company's earnings per share (EPS) for the current year are expected to drop 63.6% from the previous year to $4.75. It also missed consensus estimates for EPS in three of the four previous quarters.

The company's revenue is expected to grow by 2.1% in fiscal 2024 and its earnings per share (EPS) will increase by 21.6%, to $11,49 billion, and to $5.77.

AAP shares have fallen 15.5% in the past month, and 52.2% for the past six-month period to close at $54.82 on the last trading day.

AAP's mixed POWR ratings reflect its mixed prospects. The stock is rated C, which is equivalent to Neutral according to our proprietary rating system. The POWR ratings are calculated using 118 factors. Each factor is weighted optimally.

AAP is rated B for Value and Quality. Momentum is rated C. The stock, on the other hand has a F grade for sentiment. It is ranked 49th out of 60 stocks within the A-rated industry Auto Parts.

Click here to view the POWR ratings for AAP (Stability & Growth).

Stocks to buy:

Stock #2: AutoZone, Inc. (AZO)

AZO is a retailer and distributor of automotive parts and accessories. The company offers a variety of products for automobiles, sport utility vehicle, vans and light trucks. The company's products include A/C Compressors, Batteries and Accessories, Bearings, Belts and Hoses, Calipers, Chassis, Clutches, CV axles. Engines, Fuel Pumps, Fuse, Lighting and Ignition Products, Mufflers and Radiators.

AZO repurchased 403 thousand shares of its stock in the fourth quarter, at an average share price of $2.502, resulting in a $1 billion investment. In fiscal 2023, AZO repurchased 1,5 million shares for a total of $3.7 billion. Share buybacks will allow AZO generate more shareholder value.

AZO's gross profit margin for the trailing 12 months is 51.96%, which is 46.6% more than the industry average of 35.45%. The stock's EBITDA and net income margins are also significantly higher than industry averages, which are 11.01 and 4.40 percent, respectively.

AZO’s fourth quarter sales ended on August 26, 2023. They increased by 6.4% over the previous year to $5.69 Billion. Gross profit grew by 8.8% to $3 Billion. Operating profit increased 10.8% over the past year to $1.22billion. The company's profit before tax grew 7.1% compared to the previous quarter, reaching $1.11 billion.

The company's net profit increased by 6.8% to $864.84 millions, while its net income per common share rose from $46.46 to $46.46, a 14.7% increase year-over year.

Analysts anticipate AZO revenue to grow by 5.3% over the past year to $4.19 Billion for the first quarter of fiscal 2024 (ending in November 2023). The consensus EPS of $30.96 represents a 12.8% improvement over the previous year. The company also exceeded the consensus EPS estimate in each of the four previous quarters.

The company's revenue for its fiscal year ending August 2024 is expected to increase by 7.3%, and the EPS will grow 12.8%, to $18.73 Billion and $149.31.

AZO stock closed the last trading session at 2,540.90, up 7.3% in the past six-month period. The stock price has also risen by 21% in the last year.

AZO’s POWR ratings reflect its strong fundamentals. The stock is rated B, which is equivalent to a buy in our proprietary system.

AZO is rated A for Quality, and B for Sentiment. It is ranked 28th out of 60 stocks within the A-rated Automotive Parts Industry.

Click here to access POWR ratings for AZO Momentum, Value, Growth and Stability.

Stock No. 1: Modine Manufacturing Company

MOD provides engineered heat-transfer systems and heat-transfer component for OEM vehicle applications. The company is divided into two segments: Climate Solutions and Performance Technologies.

MOD signed a definitive contract on September 6 to sell to Regent LP affiliates three German Modine businesses in Neuenkirchen Pliezhausen and Wackersdorf. The sale of these companies is in line with the company’s strategy to concentrate its resources on technologies that have solid growth drivers and high margins.

MOD introduced a new line of electric infrared products - the MEL Series - on August 15. This commercial-grade, high-wattage electric infrared heating system offers energy efficiency, quick heat-up times and versatility for a variety of applications, such as outdoor patios or commercial spaces. This series has been UL-certified and is suitable for both residential and commercial applications. The input voltages range from 120V to 480V.

The MEL Series offers our customers a low emission heating product which can be used for a variety of applications. We are excited to introduce this new product into our growing range of electric heating products. Our team is dedicated to providing products that support Modine’s goal of engineering a healthier and cleaner world', said Jon Schlemmer Vice President and General manager of Heating Business, MOD.

MOD's trailing-12 month EBIT margin of 8.09% is higher by 9% than the industry average of 7.42%. The stock's trailing-12 month net income margin of 7.72%, and ROCE of 34% is higher than the industry averages of 4.40 and 11.17.

MOD's second quarter net sales ended June 30th 2023 increased by 15% over the previous year to $622.40 Million. Its gross profits increased 53.4% over the past year to $127.90 millions. Operating income increased 159.8% to $66.50 millions from the previous year. The company's EBITDA adjusted was $80.40 millions, a 90.5% increase year-over-year.

MOD's net income grew by 213.3% to $44.80 millions. The adjusted earnings per share of the company increased by 165.6% to $0.85 from the previous year's third quarter.

Analysts anticipate that MOD's revenue (ending in March 2024), and its EPS ($2.89 per share) will increase by 9.2% and 48.1% respectively. The company also exceeded the consensus estimates for EPS in each of its four previous quarters.

The stock closed the last trading day at $45.07. It has gained 124.1% over the year and 234.4% in the past 12 months.

MOD's POWR ratings reflect its strong outlook. The stock is rated A in our proprietary system, which means it's a strong buy.

Stocks with a B-grade for Growth, Sentiment and Quality. It is ranked 15th in the same sector.

You can also find the MOD ratings for Stability Value and Momentum.

AZO's shares were unchanged during premarket trading on Thursday. AZO shares have gained 3.03% year-to-date compared to a 12.664% increase in the benchmark S&P 500 Index during the same time period.

Mangeet K. Bouns

Mangeet became a financial journalist and investment researcher because of her keen interest in the stock markets. Mangeet uses her fundamental approach for analyzing stocks to help investors make informed decisions.