Rules of the Game: Wouldn't Write Off Auto Parts

 | Jan 07, 2013 | 11:30 AM EST  | Comments
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Here's one of the things I've come to realize by running a great deal of stock screens: Oftentimes, less-than-glamorous industries quietly work their way into prominence, far from the spotlight on tech, apparel, financials and other media-friendly sub-sectors.

This phenomenon came to mind over the weekend, when I noticed the replacement-auto-parts industry has been on the rise in recent months. I'll get to the more well-known names in a moment, but I'd like to start with a look at an under-the-radar name: Dorman Products (DORM), which deals in aftermarket auto parts.

Car aficionados know the company's name, but this is certainly not one that gets much love in the financial press. Yet, during Wednesday's wide market rally, the small-cap stock rallied to an all-time high. I'm not enthusiastic about the potential for individual small-caps in a portfolio -- but, for a more speculative idea, Dorman has some potential.

The stock pulled back slightly Thursday, and is currently finding support above its short-term exponential moving averages. After a solid march upward since September 2011, it would not be out of the question for Dorman to see a significant pullback in the not-so-distant future. Such a pullback could be constructive, as it would mean exits by shareholders lacking in conviction -- so these moves often set the stage for value shoppers to pick up shares at bargain prices.

Dorman is expected to report its fourth-quarter and full-year results next month. For 2012, analysts have pegged earnings per share at $1.87, which would constitute a gain of 20% vs. 2011. This year, earnings are expected to come in at $2.22 per share -- a 19% rise from the 2012 consensus target.

There's been plenty of analysis into the auto-parts industry, with observers citing the explosion in car repair vs. car purchasing throughout the weak U.S. economy. However, much has also been made of the slowdown in business for auto-parts retailers. Shares of AutoZone (AZO), a large-cap that's part of the S&P 500, have struggled since hitting resistance just below $400 last April and May. At this point, the stock is trading below its 50-day and 200-day moving averages, but it has been attempting a rally for the past couple weeks.

Revenue and earnings growth in the name have slowed in recent quarters -- not a hallmark of a stock with rapid price appreciation. Earnings growth is seen at 18% this year and 13% in 2014.

So, for now, AutoZone is a stock I'd leave alone. Not only are the top- and bottom-line numbers showing deterioration, but it pays no dividend -- and, as noted above, the technicals don't exactly scream "buy me" right now. When the stock regains its 200-line, that may be a time to reevaluate a potential purchase. However, for me to really get behind this stock, the sales and earnings performance would most likely have to show an improvement over expectations.

AutoZone rival O'Reilly (ORLY) is faring slightly better when it comes to chart performance. With a market cap of $10.5 billion, this stock is right on the line between mid-cap and large-cap, and it closed Friday at $91.65 -- 1.3% above its 200-day average. Still, its 200-day line is still higher than the 50-day, which is not an ideal situation. In addition, O'Reilly shares have some work to do before they regain the prior high of $108.82.

The company has confirmed it will report its fourth quarter on Feb. 6. For the full year of 2012, analysts see earnings of $4.69 per share, which would be a gain of 23% over 2011.

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