Prospects of the Zacks
Automotive - Retail & Wholesale - Parts industry look bright, thanks to growing demand for complex technology embedded cars alongside favorable macro-economic factors. While global chip shortage may pose near-term headwinds, the industry is showing signs of promise amid ramp up of e-commerce initiatives, increase in the average age of vehicles, rising demand for electric vehicles and deep focus on cost-containment efforts. Amid the tailwinds, industry participants including O’Reilly Automotive ( ORLY Quick Quote ORLY - Free Report) , AutoZone ( AZO Quick Quote AZO - Free Report) , CarMax ( KMX Quick Quote KMX - Free Report) and Advance Auto Parts ( AAP Quick Quote AAP - Free Report) are positioned for growth. About the Industry
The Zacks Automotive - Retail and Wholesale - Parts industry players execute several functions. These include manufacturing, retailing, distribution and installation of vehicle parts, equipment as well as accessories. Vehicle parts and accessories include seat covers, antifreeze, engine additives, wiper blades, batteries, brake system components, belts, chassis parts, driveline parts, engine parts and fuel pumps. Consumers have two options, either they can opt for repairing 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). The industry is a highly competitive one and is undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
3 Key Investing Trends
Widespread usage of technology is resulting in fundamental restructuring of the automotive market. Ramp up of e-commerce initiatives is buoying the industry’s prospects. The automotive retail and wholesale parts industry is reorienting its business model 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 DIY. Digitization a Key Catalyst: Increasing longevity of vehicles is driving the demand for auto parts. Per the latest study by IHS Markit, the average age of U.S. vehicles has hit a record of 12.1 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, thereby boosting sales of retail and wholesale parts. Aging Vehicles a Boon:
: Shortage of semiconductor supply is hampering the balance between demand and supply, and is likely to deal a massive blow to vehicle production. Many auto companies are forced to make production cuts amid the chip shortfall. The auto retail and wholesale parts industry’s near-term revenues and earnings may get impacted by the semiconductor shortfall. Chip Deficit a Spoilsport Zacks Industry Rank Indicates Solid Prospects
The Zacks Auto Retail & Wholesale Parts industry is a four-stock group within the broader Zacks
Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #44, which places it in the top 17% of more than 250 Zacks industries.
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 Mar 31, the industry’s earnings estimates for 2021 have moved up 7.8%.
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 24.4% over this period compared with the S&P 500 and the sector’s rise of 38.4% and 73.5%, 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.
On the basis of trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 24.04X compared with the S&P 500’s 17.34X and the sector’s 15.58X.
Over the past five years, the industry has traded as high as 26.5X, as low as 15.87X and at a median of 21.86X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
Stocks in Spotlight
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 specialty auto parts retailer is poised to benefit from store openings and distribution centers in profitable regions. It has been generating record revenues for 28 consecutive years. O’Reilly — presently carrying a Zacks Rank #2 (Buy) and a VGM Score of A — boasts a wide-ranging product that is driving comparable store sales growth. The company has a long-term expected EPS growth rate of 13.4%. Price & Consensus: ORLY 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 the firm’s footprint by opening new stores, widening online presence and strategic collaborations bode well for the Zacks Rank #2 company, having a VGM Score of A. The firm’s strong balance sheet underscores financial flexibility. The company has a long-term expected EPS growth rate of 13.9%. Price & Consensus: AAP AutoZone is one of the leading specialty retailers and distributors of automotive replacement parts as well as accessories in the United States. The Zacks Rank #3 (Hold) company — which carries a VGM Score of A — has been generating record revenues for 29 consecutive years on the back of stable growth in the auto parts market and expansion of store base. Increasing e-commerce efforts and cost-saving efforts are aiding AutoZone’s top-line growth. The company has a long-term expected EPS growth rate of 11.4%. AutoZone: Price & Consensus: AZO CarMax: Headquartered in Richmond, VA, CarMax operates as a specialty retailer of used and new vehicles. Omni-channel offerings, store-expansion initiatives, fast delivery and high-quality products are fueling the firm’s prospects. Increasing sales of used vehicles remain a bright spot for the company. Full ownership of Edmunds is set to enhance CarMax’s digital capabilities and bolster long-term prospects. The company presently carries a Zacks Rank #3. It has a long-term expected EPS growth rate of 15.2%. Price & Consensus: KMX
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