Three Top Auto Sector Stocks

02/06/2017 7:00 am EST

Focus: STOCKS

Marshall Hargrave

Contributing Editor, Wyatt Investment Research

Auto sales are hitting all-time highs again, which means more potential upside for certain companies in the auto sector, suggests Marshall Hargrave, editor of Daily Profit.

We see some new ways to play the bustling auto market. Here are the top three auto stocks for 2017:

AutoZone (AZO)

While Amazon (AMZN) has caused havoc in the retail industry, one retailing segment that remain relatively immune is auto parts. AutoZone remains somewhat 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 auto-parts 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.

Snap-on (SNA)

Snap-on, which is more than 100 years old, provides hand and power tools for individuals and professionals, including auto-shop tools and auto diagnostic equipment.

Over 40% of 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.

Copart (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. As online buying and selling of cars continues to grow, 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 environment for the three stocks above. Each is well-positioned to take advantage of these major trends.

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