Choosing Between Advance Auto Parts, Inc. (AAP) and O'Reilly Automotive, Inc. (ORLY)?

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Advance Auto Parts, Inc. (NYSE:AAP) and O’Reilly Automotive, Inc. (NYSE:ORLY) are both Services companies that recently hit new highs. Naturally, this has caught the attention of the investment community. But which is the better investment? To answer this question, we will compare the two companies across various metrics including growth, profitability, risk, return, dividends, and valuation.

Advance Auto Parts, Inc. (NYSE:AAP) operates in the Auto Parts Stores segment of the Services sector. The company has grown sales at a 9.20% annual rate over the past five years, putting it in the medium growth category. AAP has a net profit margin of 3.90% and is more profitable than the average company in the Auto Parts Stores industry. In terms of efficiency, AAP has an asset turnover ratio of 1.13. This figure represents the amount of revenue a company generates per dollar of assets. AAP’s financial leverage ratio is 1.56, which indicates that the company’s asset base is primarily funded by equity capital. Company’s return on equity, which is really just the product of the company’s profit margin, asset turnover, and financial leverage ratios, is 12.40%, which is worse than the Auto Parts Stores industry average ROE.

Advance Auto Parts, Inc. (AAP) pays out an annual dividend of 0.24 per share. At the current valuation, this equates to a dividend yield of 0.24%. The company has a payout ratio of 4.80%. AAP’s current dividend therefore should be sustainable. Stock’s free cash flow yield, which represents the amount of cash available to investors before dividends, expressed as a percentage of the stock price, is 2.32. All else equal, companies with higher FCF yields are viewed as cheaper. Company trades at a P/E ratio of 19.81, and is more expensive than the average stock in the Auto Parts Stores industry. The average investment recommendation for AAP, taken from a group of Wall Street Analysts, is 2.50, or a hold.

Over the past three months, Advance Auto Parts, Inc. insiders have been net sellers, acquiring a net of 6,241 shares. This implies that insiders have been feeling relatively bullish about the outlook for AAP. Insider activity and sentiment signals are important to monitor because they can shed light on how “risky” a stock is perceived to be at it’s current valuation. Knowing this, it makes sense to look at beta, a measure of market risk. AAP has a beta of 0.92 and therefore an below average level of market volatility.

O’Reilly Automotive, Inc. (NASDAQ:ORLY) operates in the Auto Parts Stores segment of the Services sector. ORLY has increased sales at a 8.20% CAGR over the past five years, and is considered a medium growth stock. The company has a net profit margin of 12.20% and is more profitable than the average Auto Parts Stores player. ORLY’s asset turnover ratio is 1.2 and the company has financial leverage of 7.38. Company is therefore mostly financed by debt. ORLY’s return on equity of 73.70% is better than the Auto Parts Stores industry average.

The company trades at a free cash flow yield of 1.11 and has a P/E of 18.85. Compared to the average company in the 12.58 space, ORLY is relatively expensive. The average analyst recommendation for ORLY is 2.00, or a buy.

O’Reilly Automotive, Inc. insiders have sold a net of -17,080 shares during the past three months, which implies that the company’s top executives have been feeling bearish about the stock’s outlook. Finally, ORLY’s beta of 0.78 indicates that the stock has an below average level of market risk.

Advance Auto Parts, Inc. (NASDAQ:ORLY) scores higher than O’Reilly Automotive, Inc. (NYSE:AAP) on 7 of the 11 measures compared between the two companies. ORLY has the better fundamentals, scoring higher on profitability, efficiency and return metrics.

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