Auto replacement parts market

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Dear Mr. Berko: In March 2014, I asked you about investing in Tesla, and you told me Tesla is not an investment but rather a stupid speculation. I was surprised by your various negative comments about Elon Musk and his business management skills. But I still bought 200 shares of Tesla at $216. I sold it last month at $236. It took me that long to realize that you were right.

I'd like to know your opinion of the car and truck replacement parts and accessories business as a medium-term investment. My stockbroker believes that AutoZone is the best investment of the lot, and he thinks the stock will split. He also suggested that I take a flier on a French cellphone company called Orange. I would sincerely appreciate your comments.

- DL, Destin, Fla.

Dear DL: I think P.T. Barnum and Elon Musk would have been great buddies. Tesla, one of the greatest shows of the 21st century, is making fools out of millions of Americans. Tesla (TSLA-$252) makes beautiful cars; however, I'm convinced that this company lacks the right product and the necessary management skills and that it will never earn a profit. But its stock price has been impressive, and with a $29 billion market cap, TSLA is worth half as much as Ford even though Ford sells 75 times as many vehicles.

According to the U.S. Bureau of Transportation Statistics, at the close of last year, there were approximately 260 million registered passenger vehicles traveling America's highways and byways east and west of the Mississippi. And according to the National Automobile Dealers Association, the average age of those vehicles is 11.4 years. Now the Federal Highway Administration, a division of the U.S. Department of Transportation, tells us that the average male drove 14,282 miles in 2013. Seeing as the average passenger vehicle, according to former Chrysler CEO Thomas LaSorda, has about 10,000 moving parts, quite a few of those moving parts will eventually begin to show wear and tear. And because it's less costly to replace worn brake pads or install a rebuilt water pump than it is to purchase a new car (according to Rep. Nancy Pelosi), AutoZone (AZO-$679) should continue to increase its revenues, earnings and share price.

The automobile parts replacement industry is almost as profit-positive and recession-proof as the health care industry. AZO has 5,500 stores in the U.S. and over 400 stores in Mexico, and the company's consistently superb management team has increased revenues and earnings for 21 consecutive years. AZO's aggressive share buyback program has reduced the number of outstanding shares to 30 million in 2015 from 166 million in 1995. This year, revenues are expected to top $10.2 billion, and share earnings should come in at $36.15, translating to a very conservative price-earnings ratio of 18.6-to-1. Revenues for 2016 may top $11 billion and generate share earnings of $40.95, and that would be an extremely attractive P/E of 16.4-to-1. Finally, projected 2017 revenues of $11.8 billion should generate share earnings of $44.25, and observers believe that AZO could trade between $795 and $830 a share. Therefore, Credit Suisse, Argus Financial Services, Reuters, Morningstar and Value Line have a solid "buy" recommendation on AZO, even though it doesn't pay a dividend and even though I doubt the stock will split.

Paris-based Orange (ORAN-$16.14), founded in 1990, is a $42 billion-revenue company that provides services for fixed telephony, mobile telecommunications and data transmission. It pays a 91-cent dividend that yields a dandy 5.5 percent. ORAN benefits from a relatively weak euro, which makes its products and services less expensive elsewhere. Management has established an impressive footprint in Africa, which is an attractive high-growth market. And Africa is where ORAN will continue to generate above-average revenues, selling and leasing fixed-line equipment, mobile devices, platform and network services, cloud computing services, collaborative services, satellite access infrastructures, Wi-Fi access, and fiber-optic lines. ORAN expects to earn $1.19 a share in 2016, which would amply cover its dividend. It appears that you've found yourself a darn good broker, and I like his advice.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

© 2015 Creators.com

Published: Thu, Jun 11, 2015

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