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4 Stocks to Tap the Booming Auto Retail Parts Industry

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The Zacks Automotive - Retail & Wholesale - Parts industry is benefiting from the red-hot used car market and increasing average vehicle age. These, in turn, are boosting the demand for auto parts. Shifting consumers’ preference toward electric cars have increased demand for more sophisticated auto parts, thereby brightening the industry’s revenue prospects.

In the wake of the COVID-19 pandemic, companies are ramping up digital capabilities to boost sales. Firms are also accelerating cost-cut efforts in a bid to preserve cash. These factors are aiding theindustry participantsincludingO’Reilly Automotive (ORLY - Free Report) , AutoZone (AZO - Free Report) , CarMax (KMX - Free Report) and Advance Auto Parts (AAP - Free Report) .

Industry Description

The Zacks Automotive - Retail And Wholesale - Parts industry players execute several functions. These include manufacturing, retailing, distribution, and installation of vehicle parts, equipment and accessories. Consumers have two options, either they can opt for repairing their vehicles on their own (the ‘do-it-yourself’ or ‘DIY’ segment) or take the assistance of a professional repair facility (the ‘do-it-for me’ or ‘DIFM’ segment).

5 Key Auto Retail & Wholesale Parts Industry Trends to Watch Out For

Technological Innovation a Game Changer: Widespread usage of technology and rapid digitization are resulting in fundamental restructuring of the automotive market. The automotive retail and wholesale parts industry needs to develop a detailed roadmap to make the most of the opportunities in a changing market scenario. A shift toward electric and driverless cars is spurring demand for technologically superior auto parts, as well as specific tools. Increase in the number of new, complicated and high-tech vehicles has compelled consumers to opt for more professional assistance instead of opting for DIY. 

Aging Vehicles a Boon: Increasing longevity of vehicles is driving the demand for auto parts. Per the latest study by IHS Markit, the current combined average age of vehicles has hit a record of 11.9 years. The aging vehicles are a boon to the retail and wholesale auto parts industry. In a bid to ensure long-term functioning of the aging vehicle population, customers are making investments to replace faulty vehicle parts and components.

Used Car Market a Catalyst: The coronavirus pandemic has been changing transportation behavior. Private transportation is the need of the hour. Amid economic slowdown concerns, consumers are getting more inclined toward used vehicles rather than splurging on new cars. As such, sales of used vehicles have held up better than new cars. Also, more and more individuals who had earlier thought of upgrading to newer models are instead replacing the worn out parts of their existing vehicles for the time being. As such, demand for auto parts have been on the rise.

E-commerce Initiatives on a Roll: Several dealers are now investing in e-commerce tools as the pandemic is likely to lead to wider adoption of online services, with customers staying away from showrooms.Ship-to-home next day, buy online, pick-up in stores and commercial customer ordering are picking up pace, thereby driving traffic to firms’ online sites.Increase in the usage of social media and chat tools is enabling dealers to seamlessly connect with shoppers in realtime and improve shopping experience for buyers.

Cost-Control Efforts on the Rise: In response to the uncertainties caused by the coronavirus pandemic, industry players have initiated a series of cost-saving initiatives throughout the enterprise in order to preserve cash. Focus on cost discipline is improving their margins and strengthening liquidity profile.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Auto Retail & Wholesale Parts industry is a five-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #7, which places it in the top 3% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Since Apr 30, 2020, the industry’s earnings estimates for 2020 have moved up 18.7%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector & S&P 500

The Zacks Auto Retail & Wholesale Parts industry has underperformed the Auto, Tires and Truck sector as well as Zacks S&P 500 composite over the past year.

The industry has increased 6.5% over this period compared with the S&P 500 and sector’s rise of 14.2% and 56%, respectively.

One-Year Price Performance

Industry’s Current Valuation

Since automotive companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 25.12X compared with the S&P 500’s 14.52X and the sector’s 16.26X.

Over the past five years, the industry has traded as high as 26.63X, as low as 15.89X and at a median of 21.36X, as the chart below shows.

EV/EBITDA Ratio (Past 5 Years)

Auto Retail & Wholesale Parts Stocks to Keep an Eye On

AutoZone: AutoZone is one of the leading specialty retailers and distributor of automotive replacement parts, as well as accessories in the United States. AutoZone’s fast deliveries, omnichannel efforts to improve customer shopping experience, high-quality products and supply-chain network bode well. Importantly, the firm has been generating record revenues for 29 consecutive years. This Zacks Rank #1 (Strong Buy) company’s fiscal 2021 bottom-line estimates have been upwardly revised by 5.7% over the past 30 days. AutoZone has an estimated long-term earnings growth rate of 9.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: AZO

Advance Auto Parts: Advance Auto Parts operates in the U.S. automotive aftermarket industry and is engaged in selling replacement parts (excluding tires), accessories, batteries, as well as maintenance items for vehicles. Expansion and optimization of its footprint by opening new stores, widening online presence and strategic collaborations bode well for the firm.Increasing member sign-ups for the Speed Perks 2.0 program and acquisition of the DieHard brand from Transformcoare appreciable. This Zacks Rank #1 company’s fiscal 2020 bottom-line estimates have been revised 4.5% upward over the past 30 days. Advance Auto Parts has an estimated long-term earnings growth rate of 12.9%.

Price and Consensus: AAP

O’Reilly Automotive: O'Reilly is one of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The customer-centric business model and growing demand for high-quality auto parts are likely to boost its prospects. The specialty retailer of automotive aftermarket parts has been generating record revenues for 27 consecutive years. This Zacks Rank #2 (Buy) company’s fiscal 2020 bottom-line estimates have risen 4.5% over the past 30 days. O'Reilly has an estimated long-term earnings growth rate of 14.6%.

Price and Consensus: ORLY

CarMax: Seamless integration of a world-class in-store experience and an online experience gives the company the largest functional market within the used car industry.Omni-channel marketing remains a critical component of the company’s long-term strategy, which boosts revenues.CarMax is following an aggressive store expansion initiative in the existing and new markets, which is likely to buoy its prospects. This Zacks Rank #3 (Hold) firm’s fiscal 2021 bottom-line estimates have moved 29.4% upward over the past 30 days. CarMax has an estimated long-term earnings growth rate of 12.7%.

Price and Consensus: KMX

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