Automobiles include a number of complex parts, which aid in efficient functioning of the car. In fact, the huge demand for complicated auto parts has led to the burgeoning of the secondary automotive industry, also known as the automotive aftermarket.
The Automotive - Retail And Wholesale - Parts industry deals with the manufacturing, distribution, retailing, and installation of all vehicle parts, equipments and accessories. Consumers have the option to repair on their own (the ‘do-it-yourself’ or ‘DIY’ segment) or they can take the help of a professional repair facility (the ‘do-it-for me’ or ‘DIFM’ segment).
Presently, the industry is enjoying a smooth run. Higher demand for automobiles, including growing demand for complex-technology embedded cars alongside the conducive macro economic factors have given a big impetus to the Auto Retail & Wholesale Parts industry.
Also, the frequent new model launches, and introduction of more complex and high-tech vehicles have led consumers to take more professional help. In addition to this, a rise in corporate profit and per capita disposable income has provided further boost to the industry.
The shift to autonomous and electric vehicles, though a long-term prospect, may pose challenges as well as create opportunities for the industry. However, there are some temporary issues that the industry is encountering due to the tariff fears and uncertainty over the future of NAFTA.
Industry Comparison with S&P 500, Sector
It appears that the industry’s performance outscored that of the Zacks S&P 500 Composite index. This implies that some inherent positive factors in the industry are propelling stock prices, despite its underperformance compared to the sector. In fact, higher demand has boosted the share price of industry players.
The Auto Retail & Wholesale Parts industry, which is a four-stock group within the broader Zacks Retail And Wholesale sector, has underperformed its own sector while outperforming the S&P 500 over the past year.
While the stocks in this industry have collectively gained 30.2%, the Zacks S&P 500 Composite and Zacks Zacks Retail And Wholesale sector have increased 14% and 34.2%, respectively (the blue line in the chart below represents the industry).
One-Year Price Performance
Auto Retail and Wholesale Parts Stocks Trading Cheap
We can look at a variety of metrics to evaluate the industry’s valuation picture and all of those will likely help us reach the same conclusion. A key metric that value investors always look at is the price to earnings ratio. This shows us how much investors are willing to pay for each dollar of earnings in a given stock and is easily one of the most popular financial ratios in the world.
The picture appears attractive in comparison to the S&P 500. The industry currently has a trailing 12-month PE ratio of 19.7X, a discount to the S&P 500’s PE ratio of 20.7X. As the chart below shows, the industry has traded as high as 19.7X and as low as 15.7X, with a 12-month median of 17.4X.
Price-to-Earnings Ratio (TTM)
Looking at industry’s valuation history relative to the broader market, we see that the industry has also traded at a discount to the Zacks Retail And Wholesale sector.
Price-to-Earnings Ratio (TTM)
Price Performance May Improve Due to Better Earnings Outlook
Modest rise in vehicles sales has kept demand alive for Auto Retail And Wholesale Parts industry players.
The industry’s recent stock market performance notwithstanding, the more relevant question for investors is how the industry will perform going ahead.
A good handle on the industry’s and companies’ evolving earnings outlook can help answer that question for us. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
The Price & Consensus chart for the industry below shows the market’s evolving bottom-up earnings expectations for the industry and the industry’s aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.
Price and Consensus: Zacks Auto Retail And Wholesale Parts industry
This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $10.08 EPS estimate for 2018 is not the actual bottom-up dollar EPS estimate for every company in the Zacks Auto Retail And Wholesale Parts industry but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the gain of $10.08 per share of the industry for 2018, but how this estimate has evolved recently.
The consensus estimate for the Zacks Auto Retail And Wholesale Parts industry of $10.08 per share implies not only a year-over-year improvement but also a favorable trend in earnings estimate revisions lately.
Looking at the aggregate earnings estimate revisions, it appears that analysts are bullish on this group’s earnings potential.
The consensus EPS estimate for the current fiscal year has been revised 8.2% upward since July 2018.
Current Fiscal Year EPS Estimate Revisions
Industry Rank Indicates Healthy Prospects
Moreover, the group’s Zacks Industry Rank, which is actually the average of the Zacks Rank of all the member stocks, indicates improvement in the near term.
The Zacks Auto Retail And Wholesale Parts industry currently carries a Zacks Industry Rank #15, which places it in the top 6% of roughly 256 Zacks industries. 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.
Our proprietary Heat Map shows that the group’s rank started improving in the last three weeks.
Auto Retail And Wholesale Parts Industry Promise Long-Term Growth
The mean estimate of long-term (3-5 years) EPS growth rate of 14.1% of the industry is higher than Zacks S&P 500 Composite index’s EPS growth rate of 9.8%. In fact, in the entire time span, the mean EPS estimate for the industry is higher than that of the Zacks S&P 500 Composite index, indicating steady long-term growth prospects.
Mean Estimate of Long-Term EPS Growth Rate
This is evident from the revenue growth trend, which is showing a steady upward trend since 2015.
Revenues - Auto Retail And Wholesale Parts industry
A closer look at the Zacks Auto Retail And Wholesale Parts industry leads to some interesting revelations. Cheap valuation and decent industry rank are some clear bright spots. Also, the better earnings outlook is likely to have some positive bearings on the price performance of the industry going forward.
In fact, growing demand for vehicles from the young generation, distinct changes in preference of consumers, new model launches and introduction of more high-tech vehicles have led to huge demand. This is reflected in the steadily rising revenue growth of the industry over the past couple of years. Also, the metrics show healthy long-term prospects.
However, the industry is not free of short-term challenges. The uncertainty over NAFTA and trade issues needs to be settled for a clear growth path.
Currently, CarMax, Inc. (KMX - Free Report) , which belongs to this industry, sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for current-year EPS was revised 2.2% upward over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: KMX
Below are a couple of stocks that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #2 (Buy).
Advance Auto Parts, Inc. (AAP - Free Report) : The stock of this Roanoke, VA-based automotive replacement parts company has gained 25.6% over the past year. The Zacks Consensus Estimate for current-year EPS was revised 0.1% upward over the last 60 days.
Price and Consensus: AAP
O'Reilly Automotive, Inc. (ORLY - Free Report) : The stock of this Springfield, MO automotive retailer has gained 49.1% over the past year. The Zacks Consensus Estimate for current-year EPS was revised 1.9% upward over the last 30 days.
Price and Consensus: ORLY
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