With cars getting technologically advanced with each passing day, the demand for high-quality sophisticated auto parts is rising, thereby opening up opportunities for the Zacks
Automotive - Retail & Wholesale - Parts industry. While chip deficit may cause temporary hindrances, rapid digitization, soaring popularity of electric vehicles and cost discipline are enabling the industry participants to stay on the right track. In the light of the current scenario, auto retail parts companies like 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) should be on your watchlist to reap handsome rewards. 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 as well as 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.
Key Themes Shaping the Industry
: Technological advancement is resulting in a fundamental restructuring of the automotive retail and wholesale parts industry, which is reorienting its business model to make the most of the opportunities in a changing market scenario. With the pandemic leading to wide adoption of online services, several dealers are ramping up investments in e-commerce tools, which are buoying their prospects. Tech Progress Reorienting the Business Model : A shift toward electric and driverless cars is spurring demand for technologically superior auto parts. With the transition to greener vehicles, the companies are giving utmost importance to cost management for staying ahead in the game, as investments and R&D costs are on the rise owing to the development of superior technological platforms as well as sophisticated tools. The auto retail and wholesale parts industry is chalking out a detailed roadmap to make the most out of the opportunities amid the changing market scenario. Focus on Operational Efficiency
: The chip crunch is causing demand-supply imbalance, thereby leading to temporary hiccups for the industry. Many auto companies are forced to make production cuts, which in turn may result in lost revenues for auto retail parts companies. In addition to that, the industry has to deal with rising commodity costs, a tough labor market and logistical challenges, which may limit margins. Supply Chain Constraints Persist 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 #13, which places it in the top 5% 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 outperform 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 a 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. While the industry’s earnings estimates for 2021 have increased 19% in the past year, the same for 2022 has risen 16.2% over the same time frame.
Considering the encouraging dynamics of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Auto Retail & Wholesale Parts industry has outperformed the Auto, Tires and Truck sector as well as Zacks S&P 500 composite over the past year. The industry has increased 52.5% over this period compared with the S&P 500 and the sector’s rise of 41% and 45.7%, 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 24.71X compared with the S&P 500’s 16.32X and the sector’s 12.54X.
Over the past five years, the industry has traded as high as 26.5X, as low as 15.87X and at a median of 22.33X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
These Stocks Deserve Your Attention
O’Reilly: One of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, O’Reilly currently carries a Zacks Rank #2 (Buy). The company has been generating record revenues for 28 consecutive years. It has a competitive edge due to its dual market strategy by serving DIY and DIFM customers. Store expansion efforts and robust e-commerce initiatives are fueling the firm’s top-line growth. O’Reilly currently displays a VGM Score of A and has a long-term expected EPS growth rate of 14.4%. The Zacks Consensus Estimate for 2021 and 2022 earnings indicates year-over-year growth of 17.7% and 6%, respectively. The same for 2021 and 2022 sales implies a year-over-year increase of 8.6% and 3%, respectively. Price & Consensus: ORLY AutoZone: AutoZone is one of the leading specialty retailers and distributors of automotive replacement parts as well as accessories in the United States. The company has been generating record sales for 23 consecutive years. It expects the momentum to sustain through fiscal 2022 on persistent strength across DIY and commercial businesses amid the expansion of coverage, and parts availability. Focus on increasing its market penetration and the omni-channel marketing strategy are set to boost prospects. AutoZone, a Ranked #2 firm, currently displays a VGM Score of A and has a long-term expected EPS growth rate of 13.1%. The Zacks Consensus Estimate for 2021 and 2022 earnings indicates year-over-year growth of 1.6% and 12.8%, respectively. The same for 2021 and 2022 sales implies a year-over-year increase of 0.3% and 5.8%, respectively. Price & Consensus: AZO Advance Auto: Advance Auto 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 as well as strategic collaborations bode well for the firm’s prospects. This Zacks Rank #2 company’s online portal "MyAdvance" is also aiding sales. Balance sheet strength and investor-friendly moves are the other tailwinds. Advance Auto currently displays a VGM Score of A and has a long-term expected EPS growth rate of 14.1%. The Zacks Consensus Estimate for 2021 and 2022 earnings indicates year-over-year growth of 33.5% and 11.8%, respectively. The same for 2021 and 2022 sales implies a year-over-year increase of 6.2% and 1.5%, respectively. Price & Consensus: AAP CarMax: Headquartered in Richmond, VA, CarMax operates as a specialty retailer of used vehicles. The company’s omni-channel offerings to improve customer shopping experience and opening of new stores will fuel its prospects. The acquisition of Edmunds, completed on Jun 1, 2021, will further solidify CarMax’s position in the used auto ecosystem, enhance digital capabilities and bolster revenue prospects. The company’s long-term target of achieving $33 billion in revenues, and selling 2 million units annually through retail and wholesale channels by fiscal 2026 augurs well. CarMax currently carries a Zacks Rank #3 (Hold) and has a long-term expected EPS growth rate of 13.1%. The Zacks Consensus Estimate for 2021 and 2022 earnings indicates year-over-year growth of 63.5% and 2.1%, respectively. The same for 2021 and 2022 sales implies a year-over-year increase of 59.2% and 2.9%, respectively. Price & Consensus: KMX