Auto sales are hitting all-time highs again, which means more potential upside for certain companies in the auto sector.
The average car on the road is nearly 12 years old, a situation that is driving demand for repairs and updates. In a column on auto plays last summer, I noted the number of cars already on the market is a big positive for various retailers and repair shops. Most notably since then, shares of Penske Automotive Group (NYSE: PAG) are up 44%.
In 2017, we see some new ways to play the bustling auto market. Here are the top three auto stocks for 2017:
Top Auto Stocks for 2017: AutoZone (NYSE: AZO)
While Amazon.com (NASDAQ: AMZN) has caused havoc in the retail industry, one retailing segment that remain relatively immune is auto parts. AutoZone remains insulated . . . because when a consumer needs an auto part, they need it now. In addition, low gas prices and strong employment means people are driving their cars more, which adds to demand for replacement parts.
Auto parts retailers are big beneficiaries of the the increasing average age of cars. The number of vehicles that are 16 to 24 years has risen to 44 million, 26 million more than in 2002.
The best play in this part of the market looks to be AutoZone, with nearly 6,000 stores. It also has the industry’s best returns on invested capital, thanks to well-managed stores and ability to navigate store openings and closings.
Top Auto Stocks for 2017: Snap-on (NYSE: SNA)
Snap-on is an over 100-year-old company. It provides hand and power tools for individuals and professionals, including auto-shop tools and auto diagnostic equipment. Over 40% Snap-on revenues come from the tools business. In addition, the rise in the advanced technology and complex designs in the auto industry is only creating a greater demand for Snap-on tools and products.
The do-it-yourself auto market is expected to grow to $54 billion in 2017, up from $49 billion in 2014. Now, Snap-on also offers tools for the professional do-it-for-me market as well. That market size is nearly double the DIY market, and expected to grow to $102 billion in 2017, up from $91 in 2014.
Snap-on has also gotten into the collision repair market with its purchase of Car-O-Liner. The steadiness of Snap-on’s business and cash flows also makes it an underrated dividend payer. It has increased its dividend for seven straight years and pays a 1.6% dividend yield.
Top Auto Stocks for 2017: Copart (NASDAQ: CPRT)
Copart is a unique play in that it’s a provider of auto re-marketing services and online auctions. The key here is that as people continue to buy new cars, they’ll look to sell their old ones. With the rise of buying and selling cars online, Copart should do well in the coming years.
This simple business, despite trading at all-time highs and having a great 2016, is still trading at an enticing valuation. Copart earnings are expected to grow nicely over the next five years as well.
The auto-parts industry still looks enticing. Low gas prices and solid employment numbers mean consumers are driving even more, which is a positive environment for replacement parts. In addition, auto sales continue to grow. With more cars on the road and more older cars being maintained, it’s a perfect intersection for the three stocks above, each of which is well-positioned to take advantage.