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4 Auto Replacement Stocks Worth a Look Despite Industry Headwinds

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While aging vehicles and technological advancements are likely to provide opportunities to the the Zacks Automotive- Replacements Parts industry, the companies that are part of it are likely to suffer from various near-term headwinds. For starters, the auto market is currently reeling under semiconductor shortage, which may induce lost revenues for the industry players. Further, the companies have to manage mounting manufacturing costs arising from the development of high-tech products. Also, transferring escalating costs to customers by raising auto replacement parts’ price might hamper consumers’ buying decision. 

Industry participants like Genuine Parts Company (GPC - Free Report) , LKQ Corporation (LKQ - Free Report) , Dorman Products, Inc. (DORM - Free Report)  and Standard Motor Products, Inc. (SMP - Free Report)  should work on developing parts and components in a cost-effective way that will drive sales and help them maintain market share.

Industry Description

The Zacks Automotive - Replacements Parts industry comprises companies that engage in the production, marketing and distribution of replacement components for the automotive aftermarket. The industry players offer replacement systems, components, equipment, and parts to repair as well as accessorize vehicles. A few of the important auto replacement components include engine, steering, drive axle, suspension, brakes and gearbox parts.

Key Investing Themes

Chip Crunch a Major Spoiler: A major issue posing a near-term threat to the auto replacement parts industry is shortage in the supply of semiconductors. Amid microchip deficit, the industry players are not likely to smoothly meet customers’ demand, which will result in lost revenues. Also, with various automakers halting production across the globe, near-term prospects of the auto replacement parts industry appear muted.

High Technology & Tariff Costs a Killjoy: A paradigm shift toward electric and driverless vehicles is making it necessary for the industry players to revamp their business models in order to adjust with the changing dynamics. Indeed, increasing sales of high-tech vehicles are driving demand for sophisticated auto parts and specific tools, as well as inducing customers to seek professional assistance. However, the auto replacement parts industry is bearing high costs for developing those dedicated auto components. This is likely to result in erosion of margins. Additionally, tariff charges on aluminum and steel sourced from outside the United States are increasing manufacturing costs of replacement parts and components.

Aging Vehicles a Key Catalyst: Per IHS Markit, the current combined average age of passenger cars and light trucks has hit a record of 11.9 years. The aging vehicles are a boon to auto replacement and repair companies. In a bid to ensure long-term functioning of the aging vehicle population, customers are spending heavily to replace faulty vehicle parts and components. Also, amid coronavirus-induced economic uncertainty, customers are more likely to opt for repairing old vehicles rather than splurging on new vehicles that are highly priced.

Zacks Industry Rank Paints a Dull Picture

The Zacks Automotive – Replacements Parts industry is an eight-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #160, which places it in the bottom 37% of around 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak 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 losing confidence in this group’s earnings growth potential. Over the past six months, the industry’s earnings estimates for 2021 have moved 1% south.

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, Outperforms S&P 500

The Zacks Automotive – Replacement Parts industry has lagged the Auto, Tires and Truck sector and Zacks S&P 500 composite over the past year. The industry has witnessed 90% growth, underperforming the sector’s gain of 166.2% but outpacing the S&P 500’s 66.5% rally in the said period.

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. On the basis of trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 10.47X compared with the S&P 500’s 17.63X and the sector’s trailing-12-month EV/EBITDA of 19.19X. Over the past five years, the industry has traded as high as 15.39X, as low as 6.74X and at a median of 12.66X, as the chart below shows.

EV/EBITDA Ratio (Past Five Years)

 

4 Stocks That Should Be on Your Watchlist

Dorman Products: Pennsylvania-based Dorman Products is a leading supplier of automotive and heavy-duty replacement parts. The company serves customers in the United States and Asia. Acquisitions of Flight Systems Automotive Group and MAS Automotive Distribution Inc. have taken Dorman’s game a notch higher. Solid stock buyback programs underscore management’s commitment to return capital to shareholders. Solid financials are also likely to help this Zacks Rank #2 (Buy) company to tide over coronavirus-led uncertainty. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 30.1% and 11.5%, respectively.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: DORM

Genuine Parts: Atlanta-based Genuine Parts distributes auto and industrial replacement parts across the United States, Canada, Mexico, Australia, New Zealand, Singapore, Indonesia, France, the United Kingdom, Germany, and Poland. The Inenco buyout is a significant addition to Genuine Parts' global industrial portfolio, which is driving the company’s growth. Aggressive e-commerce initiatives, investor-friendly moves and operational efficiency are other positives. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 8.9% and 2.4%, respectively. The stock currently carries a Zacks Rank #3 (Hold).

Price & Consensus: GPC

LKQ Corp.: Headquartered in Illinois, LKQ Corp. is one of the leading providers of replacement parts, components and systems. Frequent acquisitions by the firm to expand geographic footprint, improve customer offerings and adopt new technologies are buoying prospects. Balance sheet strength, soaring free cash flow and cost discipline are boosting investors’ optimism on the stock. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 8.6% and 5%, respectively. The stock presently carries a Zacks Rank #3.

Price & Consensus: LKQ

Standard Motor: New York-based Standard Motor is one of the leading manufacturers and distributors of premium automotive replacement parts for engine management, as well as temperature control systems. The Pollak business buyout is boosting Standard Motor’s engine management segment’s prospects, and leading to various commercial as well as operational synergies. A healthy balance sheet and cost-cut measures undertaken by this Zacks Rank #3 firm bode well. The Zacks Consensus Estimate for fiscal 2022 earnings indicates year-over-year growth of 10.8%. The firm has managed to top earnings estimates in three of the trailing four quarters and met once, with an average surprise of 67.3%.

Price & Consensus: SMP

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