Consumer’s growing awareness of vehicle servicing and preventive maintenance has led to improved vehicle longevity. Presently, the average age of vehicles on the road is 11.5 years and is augmenting at a steady pace. This surging demand for replacement parts to maximize lifetime value of old vehicles is driving revenues and opening up huge growth prospects for companies offering such automotive replacement parts.
Improving economic conditions and employment rate are likely to boost demand for replacement parts across the globe. However, as majority of replacement parts are outsourced, the recently raised tariffs will eliminate the price advantage the industry previously enjoyed. Also, sourcing the replacement parts mostly from the United States will mar the price competition in the aftermarket parts market.
Nonetheless, higher disposable income among consumers in the emerging economies will positively impact the expansion of the replacement parts market. Further, increasing demand for technologically advanced parts and stricter regulatory standards along with fluctuating oil prices are anticipated to aid growth for replacement parts. In the United States, escalating interest rates and steep gasoline prices are likely to curb consumers’ investment in new vehicles and hold on to their money put on old ones.
Industry Comparison with S&P 500 & Sector
Trade tensions make the industry’s cash generation quite uncertain partly due to rising costs. Looking at shareholder returns, it seems investors are not too positive about the growth prospects of the industry. The Zacks Automotive – Replacement Parts industry, a seven-stock group within the broader Zacks - Automotive sector, has outperformed its own sector while underperforming the Zacks S&P 500 Composite.
The stocks in this industry have collectively gained 6.8% against the Zacks Auto Sector’s decline of 6.9% and the Zacks S&P 500 Composite’s rally of 16.1%.
One-Year Price Performance
Replacement Parts Stocks Trading Pretty Expensive
A number of metrics can be used to evaluate the industry’s valuation scenario. However, since the industry we are discussing here is a capital intensive one, it will be apt to look into EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio or multiple as a valuation metric. We are choosing this metric over others as it considers both equity and debt while ignoring the difference in capital structures and the effect of non-cash expenses.
Despite the industry underperforming the S&P 500, the valuation seems high. Currently, the industry has a trailing 12-month EV/EBITDA ratio of 15.3 at a premium to the S&P 500’s EV/EBITDA ratio of 11.8. The chart below shows that the industry has traded as high as 15.4X and as low as 12X with a 12-month median of 13.3X.
EV/EBIDTA Ratio (TTM)
Moreover, the parameter when compared with the EV/EBIDTA ratio of its broader sector shows the industry to be pricey for investors. The trailing 12-month EV/EBIDTA ratio of the Zacks Auto Sector is 8.4 with the median level of 8.7, both lying below the Zacks Automotive - Replacement Parts Industry’s respective ratios. Over the time frame shown, the group has been trading at a premium to the sector.
EV/ EBIDTA Ratio (TTM)
Price Performance Uncertain with No Visible Trend in Earnings
Improving economic conditions with high employment rates might support the group’s growth. Also, evolving customer preferences leading to inflated demand will drive industry sales. Nevertheless, the Replacement Parts industry has to deal with the costs related to technical changes and manufacturing expenses.
However, it is important to know whether the industry has potential to perform better than the broader market in the coming quarters. For this, a trustworthy option is to check the industry’s prospect of a solid performance glancing through the earnings outlook of its member companies. Empirical research shows that earnings outlook of the member companies has a direct bearing on the market performance of the respective stock.
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. In the chart, the earnings expectation for 2018 is represented by the light blue line while the red line represents the same for 2019.
Price and Consensus: Zacks Automotive – Replacement Parts Industry
This becomes clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Notably, the $2.73 EPS estimate for the industry during 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Auto – Replacement Parts industry but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the industry’s EPS for 2018 but how its projection has evolved recently.
Current Fiscal Year EPS Estimate Revisions
As you can see here, the $2.73 EPS estimate for 2018 has nearly remained firm since June. However, when compared year to date, the consensus estimate for 2018 EPS has been revised 1.1% upward. Looking at the aggregate earnings estimate revisions, it appears that analysts are quite optimistic about the group’s earnings potential.
Zacks Industry Rank Indicates Good Prospects
Moreover, the group’s Zacks Industry Rank, which is actually the average of the Zacks Rank of all member stocks, reflects a stable performance in the near term.
The Zacks Automotive – Replacement Parts industry currently carries a Zacks Industry Rank #88, which places it at the top 34% 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.
Auto Replacement Parts Industry’s Long-Term Growth
Over the past year, group’s mean estimate for long-term (3 -5 years) EPS growth rate is above the Zacks S&P 500 Composite. Since May 2018, the industry’s mean estimate for long-term (3 -5 years) EPS growth rate has been 11.5% compared with the Zacks S&P 500 Composite’s 9.8%.
Mean Estimate of Long-Term EPS Growth Rate
In fact, the basis of this long-term EPS growth could be moderate growth of the top line of group members in recent years.
Revenues – Automotive – Replacement Parts Market
Trade tensions inducing increased tariffs might put the brakes on the pricing competition in the market, which the replacement parts industry previously enjoyed owing to cheap imports. This may possibly slow down the industry’s growth prospects.
Nonetheless, swelling demand, originating from growing technological changes in the auto sector has opened up huge prospects for the replacement parts industry. Its performance depends primarily on how well it handles the evolving technological trends and manages the changing need for technically-advanced and fairly priced replacement parts. Investors can opt for a few replacement parts stocks with a strong earnings view.
Currently, we don’t have any stocks in the Automotive–Replacement Parts industry with a Zacks Rank #1 (Strong Buy). The industry currently has a couple stocks, witnessing positive earnings estimate revisions and carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
SPX Corporation (SPXC - Free Report) : The consensus estimate for this Charlotte, NC-based company’s consensus EPS estimate for the current year has been revised 2.2% upward over the past 60 days. This stock with a Zacks Rank of 2 has rallied 29.8% in the past year.
Price and Consensus: SPXC
Motorcar Parts of America, Inc. (MPAA - Free Report) : This Torrance, CA-based manufacturer and distributor of automotive aftermarket parts’ consensus EPS estimate for fiscal 2019 has been revised 4.6% upward over the past 60 days. This stock with a Zacks Rank of 2 has gained 9.7% in the past six months.
Price and Consensus: MPAA
Below is one stock with a bearish Zacks Rank as well as negative earnings estimate revisions. We recommend investors to avoid this stock for the time being.
Standard Motor Products Inc. (SMP - Free Report) : The consensus mark for EPS estimate pertaining to this Long Island City, NY-based provider of automotive replacement parts has been revised 7.8% downward for 2018 over the past 60 days. This Zacks Rank #5 (Strong Sell) stock has climbed 10.4% in the past year.
Price and Consensus: SMP
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