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4 Auto Replacement Stocks in Focus Despite Industry Challenges
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The global chip famine is weighing on the Zacks Automotive- Replacement Parts industry. While increasing average age of vehicles is working in favor of auto replacement and repair companies, escalating expenses are dimming the industry prospects. A paradigm shift toward electric and driverless vehicles is making it necessary for auto replacement firms to revamp their business models, resulting in high capital spending and thereby limiting cash flows. Soaring commodity costs are making matters worse and clipping gross margins of industry participants. Deep focus on operational efficiency in developing parts and components is likely to benefit key industry players 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) .
Industry Overview
The Zacks Automotive - Replacement 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. The auto replacement market is somewhat less exposed to business downturns as consumers are more inclined to spend on replacement parts to maintain their vehicles rather than splurging on new ones. Consumers can either opt for repairing vehicles on their own or can avail professional service for the same. The industry is undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
3 Themes Influencing Industry Dynamics
Supply Chain Distortions Acting as Speed Bump: Auto replacement companies are reliant on semiconductors, which are in short supply. Deficit of microchips is hindering business operations of the industry participants and the chip crunch is not likely to ease anytime soon, in turn resulting in lost revenues. Additionally, costs of raw materials like steel and non-ferrous metals are on the rise due to semiconductor shortage, which are further impacting gross margins of auto replacement firms.
EV Frenzy Resulting in Cost Headwinds: Soaring popularity of eco-friendly cars and technology shift, which is in full swing, are forcing auto replacement companies to develop and upgrade their offerings to remain on par with the evolving trends in the automotive market. New features and component designs call for abundant capital as well as high R&D spending. The auto replacement parts industry is bearing high costs for developing those dedicated auto components. While future mobility is creating opportunities, it’s bringing its own set of problems for the industry and is likely to result in erosion of margins, at least in the near term.
Aging Vehicles a Bright Spot: Per the latest IHS Markit data, the current combined average age of vehicles has hit a record of 12.1 years. For the smooth functioning of aging vehicles, customers are spending heavily to replace any faulty parts and components. The longevity of vehicles is in turn acting as a tailwind for the auto replacement industry.
Zacks Industry Rank Indicates Tepid Prospects
The Zacks Automotive – Replacement Parts industry is an eight-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #185, which places it in the bottom 27% 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 bottom 50% of the Zacks-ranked industries is a result of negative 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.
Despite the industry’s gloomy near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Outperforms Sector and S&P 500
The Zacks Automotive – Replacement Parts industry has outpaced the Auto, Tires and Truck sector and Zacks S&P 500 composite over the past year. The industry has risen 48.4% compared with the sector and S&P 500’s growth of 45.2% and 36.8%, 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 10.31X compared with the S&P 500’s 17.97X and the sector’s trailing-12-month EV/EBITDA of 15.88X. Over the past five years, the industry has traded as high as 15.39X, as low as 6.81X and at a median of 12.32X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
4 Stocks That Deserve Your Attention
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. Last month, the company inked a $338-million deal to buy Dayton Parts, which would expand Dorman’s heavy-duty manufacturing and distribution platform. The transaction, which is expected to be completed in second-half 2021, will be immediately accretive to its earnings. Solid financials and robust stock buyback programs instill further optimism. Over the past three months, shares of this Zacks Rank #2 (Buy) firm have increased 7% compared with the industry’s 5.8% growth. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 31.3% and 10.5%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: DORM
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 has enhanced its growth opportunities in various markets served. Additionally, the company’s acquisition of the particulate matter sensor product line from Stoneridge boosts prospects. Healthy balance sheet gives the firm enough financial flexibility to tap on growth opportunities. Standard Motor’s cost-cut initiatives are also paying off well and driving cash flows. The company displays an impressive earnings surprise history, topping estimates in each of the trailing four quarters. It presently carries a Zacks Rank #2 and has a VGM Score of B.
Price & Consensus: SMP
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. Acquisitions of PartsPoint and Alliance Automotive Group, and the possession of full ownership in Inenco have bolstered the company’s growth. Aggressive e-commerce strides, cost-containment efforts and steady dividend growth are further bolstering the firm’s prospects. Genuine Parts recently raised its 2021 outlook, and now projects revenues from automotive and industrial sales to witness a year-over-year uptick of 11-13% and 6-8%, respectively. The Zacks Consensus Estimate for fiscal 2021 earnings implies year-over-year growth of 20.1%. The firm currently carries a Zacks Rank #3 and has a VGM Score of A.
Price & Consensus: GPC
LKQ Corp: Headquartered in Illinois, LKQ Corp. is one of the leading providers of replacement parts, components and systems. The Elite Electronics buyout is driving sales and profit of the company. The acquisition of Greenlight Automotive is also set to bolster LKQ’s prospects. Focus on cost discipline and simplifying its operating model is likely to result in sustained margin expansion. Low leverage and high liquidity of the firm increase its financial flexibility and lower default risk. Amid the tailwinds, shares of LKQ Corp. have risen 11.2% over the past three months, outpacing the industry’s 5.8% growth. The company currently carries a Zacks Rank #3 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 23.5% and 6.5%, respectively.
Price & Consensus: LKQ
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4 Auto Replacement Stocks in Focus Despite Industry Challenges
The global chip famine is weighing on the Zacks Automotive- Replacement Parts industry. While increasing average age of vehicles is working in favor of auto replacement and repair companies, escalating expenses are dimming the industry prospects. A paradigm shift toward electric and driverless vehicles is making it necessary for auto replacement firms to revamp their business models, resulting in high capital spending and thereby limiting cash flows. Soaring commodity costs are making matters worse and clipping gross margins of industry participants. Deep focus on operational efficiency in developing parts and components is likely to benefit key industry players 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) .
Industry Overview
The Zacks Automotive - Replacement 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. The auto replacement market is somewhat less exposed to business downturns as consumers are more inclined to spend on replacement parts to maintain their vehicles rather than splurging on new ones. Consumers can either opt for repairing vehicles on their own or can avail professional service for the same. The industry is undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
3 Themes Influencing Industry Dynamics
Supply Chain Distortions Acting as Speed Bump: Auto replacement companies are reliant on semiconductors, which are in short supply. Deficit of microchips is hindering business operations of the industry participants and the chip crunch is not likely to ease anytime soon, in turn resulting in lost revenues. Additionally, costs of raw materials like steel and non-ferrous metals are on the rise due to semiconductor shortage, which are further impacting gross margins of auto replacement firms.
EV Frenzy Resulting in Cost Headwinds: Soaring popularity of eco-friendly cars and technology shift, which is in full swing, are forcing auto replacement companies to develop and upgrade their offerings to remain on par with the evolving trends in the automotive market. New features and component designs call for abundant capital as well as high R&D spending. The auto replacement parts industry is bearing high costs for developing those dedicated auto components. While future mobility is creating opportunities, it’s bringing its own set of problems for the industry and is likely to result in erosion of margins, at least in the near term.
Aging Vehicles a Bright Spot: Per the latest IHS Markit data, the current combined average age of vehicles has hit a record of 12.1 years. For the smooth functioning of aging vehicles, customers are spending heavily to replace any faulty parts and components. The longevity of vehicles is in turn acting as a tailwind for the auto replacement industry.
Zacks Industry Rank Indicates Tepid Prospects
The Zacks Automotive – Replacement Parts industry is an eight-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #185, which places it in the bottom 27% 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 bottom 50% of the Zacks-ranked industries is a result of negative 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.
Despite the industry’s gloomy near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Outperforms Sector and S&P 500
The Zacks Automotive – Replacement Parts industry has outpaced the Auto, Tires and Truck sector and Zacks S&P 500 composite over the past year. The industry has risen 48.4% compared with the sector and S&P 500’s growth of 45.2% and 36.8%, 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 10.31X compared with the S&P 500’s 17.97X and the sector’s trailing-12-month EV/EBITDA of 15.88X. Over the past five years, the industry has traded as high as 15.39X, as low as 6.81X and at a median of 12.32X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
4 Stocks That Deserve Your Attention
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. Last month, the company inked a $338-million deal to buy Dayton Parts, which would expand Dorman’s heavy-duty manufacturing and distribution platform. The transaction, which is expected to be completed in second-half 2021, will be immediately accretive to its earnings. Solid financials and robust stock buyback programs instill further optimism. Over the past three months, shares of this Zacks Rank #2 (Buy) firm have increased 7% compared with the industry’s 5.8% growth. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 31.3% and 10.5%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: DORM
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 has enhanced its growth opportunities in various markets served. Additionally, the company’s acquisition of the particulate matter sensor product line from Stoneridge boosts prospects. Healthy balance sheet gives the firm enough financial flexibility to tap on growth opportunities. Standard Motor’s cost-cut initiatives are also paying off well and driving cash flows. The company displays an impressive earnings surprise history, topping estimates in each of the trailing four quarters. It presently carries a Zacks Rank #2 and has a VGM Score of B.
Price & Consensus: SMP
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. Acquisitions of PartsPoint and Alliance Automotive Group, and the possession of full ownership in Inenco have bolstered the company’s growth. Aggressive e-commerce strides, cost-containment efforts and steady dividend growth are further bolstering the firm’s prospects. Genuine Parts recently raised its 2021 outlook, and now projects revenues from automotive and industrial sales to witness a year-over-year uptick of 11-13% and 6-8%, respectively. The Zacks Consensus Estimate for fiscal 2021 earnings implies year-over-year growth of 20.1%. The firm currently carries a Zacks Rank #3 and has a VGM Score of A.
Price & Consensus: GPC
LKQ Corp: Headquartered in Illinois, LKQ Corp. is one of the leading providers of replacement parts, components and systems. The Elite Electronics buyout is driving sales and profit of the company. The acquisition of Greenlight Automotive is also set to bolster LKQ’s prospects. Focus on cost discipline and simplifying its operating model is likely to result in sustained margin expansion. Low leverage and high liquidity of the firm increase its financial flexibility and lower default risk. Amid the tailwinds, shares of LKQ Corp. have risen 11.2% over the past three months, outpacing the industry’s 5.8% growth. The company currently carries a Zacks Rank #3 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 23.5% and 6.5%, respectively.
Price & Consensus: LKQ