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Seeking Recession-Proof Stocks? These 3 Companies Look Attractive
Stock Analysis & Ideas

Seeking Recession-Proof Stocks? These 3 Companies Look Attractive

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With all the recent talk about a recession, it’s a good idea to seek out recession-resistant stocks. These three stocks are in a recession-resistant sector with secular and macroeconomic trends that should give them a boost.

As concerns about a possible recession grow, many investors are looking for recession-proof stocks. Of course, no stock is recession-proof, but some sectors are a bit more resistant to recessions than others. One such sector is auto parts retailers, and some other secular trends are making these companies look even more attractive. In this piece, we used TipRanks’ Comparison Tool to evaluate three auto parts retailers. The companies are O’Reilly Automotive (ORLY), CarParts.com (PRTS), and Advance Auto Parts (AAP),

Of course, some retailers in the space look better than others. There are different reasons to be bullish on each company, although CarParts.com looks riskier than the other two.

The Bull Thesis for Auto Parts Retailers

In general, the auto parts retail sector looks attractive right now. Chip shortages are still affecting new car sales. Of course, a shortage of supply means higher prices, and that’s certainly the case. New vehicle prices rose 12.6% year-over-year in June, while prices for used vehicles rose 16% from last year. Due to the higher prices, drivers are holding onto their vehicles for much longer than usual. Therefore, more people are buying auto parts because they’re fixing their vehicles instead of replacing them.

Auto parts retailers are also recession-resistant because they have the ability to pass their higher costs onto customers. Most people are willing or required to pay those higher prices because they need to continue getting from point A to point B, no matter how high the prices go.

As a result, even in the event of a recession, auto parts retailers should continue to grow, and the vehicle shortage won’t be going away anytime soon. Experts expect the shortage of new vehicles to last into next year or even 2024.

1. O’Reilly Automotive

O’Reilly Automotive shares have been moving higher over the last month, rising about 10.9% to wipe away the difficult period they had between the end of April and late June. The company used that weakness to buy back 2.2 million shares for $1.38 billion — a smart move in the current environment. O’Reilly repurchased another 400,000 shares between the end of the second quarter and the date of its earnings release.

Although the retailer missed the consensus estimates for earnings and revenue, its fundamentals are in decent shape. One metric that should be pointed out is the company’s net profit margin. Although it declined 120 basis points year-over-year in the second quarter, probably due to inflation, at 15.7%, O’Reilly has the best profit margin of all three of the retailers in this article.

The company also guided for comparable-sales growth for 2022 to be between 3% and 5%, which looks conservative compared to the 4.8% and 4.3% it recorded in the first and second quarters, respectively. O’Reilly also appears to have some long-term staying power, recording an increase of 30.4% in three-year comparable store sales stacks.

Turning to Wall Street, O’Reilly Automotive has a Strong Buy consensus rating based on nine Buys, two Holds, and zero Sells assigned over the last three months. At $744.73, the average O’Reilly Automotive price target implies upside potential of 5.6%.

2. CarParts.com

At the other end of the spectrum, we have CarParts.com, which has been extremely volatile this year compared to O’Reilly. CarParts.com is up 17.6% in the last month, although it’s still off 24% year-to-date. However, investors who timed their purchases right have enjoyed some sizable gains recently.

That said, investors may need to be willing to accept the volatility associated with this stock in exchange for the possibility of larger gains. Additionally, CarParts.com has been on many funds’ radars for some time.

For example, Khrom Capital highlighted the company last year, noting that its new CEO had reinvented it. The fund bought its shares for about $15, with the expectation that they would rise to between $29 and $48, but the stock has plunged. It’s possible that Khrom was too early with its thesis because a turnaround does take time.

One concern is that the company’s net profit margin is minuscule, at 2.3%, although it has almost doubled year-over-year. Of course, Amazon (AMZN) revealed just how e-commerce firms could operate on razor-thin margins, but CarParts.com has mostly been unprofitable.

The company’s net change in cash was negative but gradually shrunk quarter by quarter until it became positive in Q1, only to turn negative again in Q2. CarParts.com also became free cash flow positive in its first quarter this year, but it was negative in Q2.

This suggests that the stock is risky. Perhaps a neutral rating would be more appropriate in the near term until it becomes clear which direction it will move in, but investors do risk losing out on some major gains by waiting. At the end of the day, it just depends on a trader’s risk tolerance.

Turning to Wall Street, CarParts.com has a Moderate Buy consensus rating based on two Buys, zero Holds, and zero Sell ratings assigned over the last three months. At $14.50, the average CarParts.com price target implies upside potential of 69.8%.

3. Advance Auto Parts

Advance Auto Parts shares are up almost 13% over the last month, although they are down 18.6% year-to-date.

Unfortunately, Advance Auto Parts just barely missed the consensus estimates for its first-quarter earnings and revenue. It came in at $3.57 per share on $3.37 billion in revenue compared to the consensus of $3.59 per share on $3.39 billion in sales.

Advance Auto Parts recorded a net profit margin of 4%, which is quite small for a brick-and-mortar retailer, and it declined by 150 basis points year-over-year, possibly due to inflation.

Unfortunately, the retailer’s net change in cash has been negative over the last several quarters, and it dropped further to -$462.7 million in the April quarter. Advance Auto Parts recorded negative free cash flow in the April quarter, another troubling sign.

Turning to Wall Street, Advance Auto Parts has a Moderate Buy consensus rating based on 11 Buys, five Holds, and zero Sell ratings assigned over the last three months. At $231, the average Advance Auto Parts price target implies upside potential of 18.3%.

Conclusion: CarParts.com Offers the Highest Upside Potential and Risk

At the end of the day, it appears that CarParts.com could offer higher returns than either Advance Auto Parts or O’Reilly Automotive. However, its choppy stock price and ongoing turnaround present a greater risk.

There is also one other consideration, which is that CarParts.com has significantly less debt compared to assets than either of the other two. All in all, the auto parts sector, in general, looks attractive, especially if a recession ensues, but investors must consider their risk tolerance when selecting names in the space.

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