Auto-Parts Retailers Look Compelling Amid Sell-Off

Zain Akbari: While we were disappointed by O'Reilly's second-quarter earning pre-announcement, which featured 1.7% comparable store sales growth, which was much lower than guidance--which was closer to 3% to 5%--we do still think that the larger scaled parts retailers do offer long-term investors considerable advantages.

That said, we do plan to reduce our fair value estimates by about mid- to high-single digits as a percentage. However, we do see a long-term opportunity as these larger scaled part retailers take advantage of the fact that they can provide better service levels than their smaller scale peers and also ward off digital threats.

As a result, we continue to like the sector even though the short-term should be a little bit choppier. Of the names in our coverage universe, we particularly like O'Reilly and AutoZone, just by virtue of their strong management teams, and Advance, on the other hand, does have a great opportunity for investors in that the discount to fair value is a bit higher. Now that said, that comes in the context of a broader turnaround that adds some uncertainty. Genuine Parts has a much different mix of business by virtue of its nonautomotive parts businesses, and so therefore the opportunity there is somewhat less pronounced.