In this piece, I evaluated two auto parts stocks, Advance Auto Parts, Inc. (AAP) and Luminar Technologies, Inc. (LAZR), to determine which one is a better investment. I believe AAP has the potential to perform better than LAZR for the reasons explained throughout this article.

Supply chain disruptions, high inflation, and rising interest rates led to a decline in the sales of light vehicles last year to their lowest level since 2012. Over 13.75 million light vehicles were sold the previous year, representing a year-over-year decline of 8% to 9%.

Despite being closely linked to the automobile industry, the auto parts industry is not entirely dependent on the purchase of new vehicles. This makes the sector attractive from an investment standpoint as it can remain insulated against the volatility caused by economic cycles.

According to Cox Automotive, new-vehicle sales for 2023 are forecasted to increase 3% year-over-year to 14.20 million units. Although auto parts companies only partially rely on new-vehicle sales for their growth, the increase in new-vehicle sales is expected to benefit the industry.

The global automotive OEM market size is expected to grow at a CAGR of 4.2% to hit $46 billion by 2030. In addition, the global automotive aftermarket industry’s revenue is expected to grow at a CAGR of 4% to reach $589.01 billion by 2030.

During the first quarter, AAP’s EPS came 6.3% above analyst estimates, while its revenue missed the consensus estimate by 0.2%. LAZR’s revenue beat the consensus estimate by 21.5% during the first quarter, while its EPS fell short of analyst estimates by 15.8%.

AAP revised its outlook for fiscal 2023, with net sales now expected to come between $11.20 billion and $11.30 billion, down from the previous forecast of $11.40 billion to $11.60 billion. Its operating income margin is expected to be between 5% and 5.3%. Moreover, its EPS is expected to be between $6 and $6.50.

For fiscal 2023, LAZR expects at least 100% revenue growth and has forecasted to reach a positive non-GAAP gross margin by the fourth quarter.

When it comes to price performance, LAZR is the clear winner. LAZR’s stock has gained 13.1% in price over the past month compared to AAP’s 41.9% decline. In addition, LAZR’s stock has gained 37.6% year-to-date, compared to AAP’s 50.4% decline.

However, here are the reasons I think AAP could perform better in the near term:

Recent Financial Results

AAP’s net sales for the first quarter ended April 22, 2023, increased 1.3% year-over-year to $3.42 billion. Its gross profit declined 2.4% year-over-year to $1.47 billion. The company’s net income fell 69.5% year-over-year to $42.65 million. In addition, its EPS came in at $0.72, representing a decrease of 68.1% year-over-year.

LAZR’s total revenues for the first quarter ended March 31, 2023, increased 111.7% year-over-year to $14.51 million. Its non-GAAP gross loss widened 48% year-over-year to $11.80 million. The company’s non-GAAP net loss widened 58.2% year-over-year to $88.67 million. Also, its non-GAAP loss per share widened 50% year-over-year to $0.24.

Expected Financial Performance

Analysts expect AAP’s EPS for fiscal 2023 to decline 37.1% year-over-year to $8.20. Its revenue for fiscal 2023 is expected to increase 1.8% year-over-year to $11.35 billion. Its EPS and revenue for fiscal 2024 are expected to increase 27.2% and 3.1% year-over-year to $10.43 and $11.70 billion, respectively.

LAZR’s EPS for fiscal 2023 and 2024 is expected to remain negative. Its revenue for fiscal 2023 and 2024 is expected to increase 112.1% and 207.7% year-over-year to $86.32 million and $265.58 million.

Profitability

AAP’s trailing-12-month revenue is 230.6 times what LAZR generates. AAP is more profitable, with a gross profit margin and levered FCF margin of 44.01% and 0.53%, compared to LAZR’s negative 134.66% and 129.70%, respectively. Also, AAP’s asset turnover of 0.93x compares to LAZR’s 0.07x.

Valuation

In terms of forward EV/Sales, AAP is currently trading at 0.72x, significantly lower than LAZR’s 33x. AAP’s trailing-12-month Price/Sales ratio of 0.39x is considerably lower than LAZR’s 50.95x.

Thus, AAP is relatively more affordable.

POWR Ratings

AAP has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, LAZR has an overall rating of F, translating to a Strong Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AAP has a B grade for Quality, in sync with its high profitability. LAZR’s poor profitability justifies its F grade for Quality.

AAP has a B grade for Value, consistent with its discounted valuation. On the other hand, LAZR has an F grade for Value, in sync with the company’s stretched valuation.

Of the 58 stocks in the A-rated Auto Parts industry, AAP is ranked #33, while LAZR is ranked last in the same industry.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Sentiment. Click here to view AAP’s ratings. Get all the ratings of LAZR here.

The Winner

AAP reduced its fiscal 2023 guidance for net sales and operating income margin as it expects the competitive dynamics to continue this year. On the other hand, LAZR expects strong revenue growth in fiscal 2023 and has forecasted a positive operating income margin by the end of the year. However, the company still looks some time away from achieving profitability.

Considering these factors, AAP could be a better investment than LAZR.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Auto Parts industry here.

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AAP shares were trading at $71.03 per share on Thursday morning, down $1.86 (-2.55%). Year-to-date, AAP has declined -51.09%, versus a 9.65% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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