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Stay Ahead of Industry Odds With These 2 Auto Replacement Stocks
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Chip crunch and supply chain chaos are weighing on the Zacks Automotive- Replacement Parts industry. The industry is also battling cost headwinds. While future mobility is creating opportunities, it’s bringing its own set of problems for the companies in the form of high capex and R&D expenses, thereby resulting in erosion of margins. Companies should work on developing parts and components in a cost-effective way that will drive sales and help them maintain market share. The increasing average age of vehicles seems to be the only catalyst in an otherwise gloomy auto replacement parts industry. Firms like Genuine Parts Company (GPC - Free Report) and LKQ Corporation (LKQ - Free Report) appear better positioned to tide over the challenges.
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 splurge on new ones. Consumers can either opt for repairing vehicles on their own or can avail professional services for the same. The industry is undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
Key Factors Shaping the Industry
Chip Crisis and Supply Chain Snarls Play Spoilsport: A major near-term threat to the auto replacement parts industry is a shortage in the supply of semiconductors— a byproduct of COVID-19 that only worsened with the Russia-Ukraine war. The 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. Logistical challenges and disruptions in the supply chain systems are keeping the prospects of the industry muted.
High Commodity & Operating Costs Dent Margins: Costs of raw materials like steel and non-ferrous metals are on the rise due to chip famine, further impacting the gross margins of auto replacement firms. Commodity inflation is not likely to abate anytime soon and will act as a major speed bump for quite some time. Additionally, the auto replacement parts industry is bearing high costs for developing technologically advanced auto components amid the soaring popularity of EVs, which is likely to weigh on profits further.
Increasing Age of Vehicles Act as a Silver Lining: Amid all the gloom and doom, the only bright spot seems to be the longevity of vehicles. The average age of U.S. vehicles has hit a new record of 12.2 years. In a bid to ensure the long-term functioning of the aging vehicles, customers will more likely spend on repairs, thereby driving the business of auto replacement and repair companies. Also, amid economic uncertainty, customers are more likely to opt for repairing old vehicles rather than splurging on new vehicles that are highly-priced.
Zacks Industry Rank Signals Glum Prospects
The Zacks Automotive – Replacements Parts industry is a seven-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #214, which places it in the bottom 15% 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. Since March, the industry’s earnings estimates for 2022 have moved 2.4% south.
Despite the industry’s dim near-term outlook, we will present two stocks worth considering for your portfolio. But before that, let's take a look at the industry’s stock market performance 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 2.5% against the sector and the S&P 500’s decline of 15.6% and 13.2%, 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 8.72X compared with the S&P 500’s 12.30X and the sector’s trailing-12-month EV/EBITDA of 15.28X. Over the past five years, the industry has traded as high as 15.08X, as low as 6.76X and at a median of 10.45X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks Braving Industry Challenges
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. The acquisitions of PartsPoint and Alliance Automotive Group, and the possession of full ownership in Inenco have bolstered the company’s growth. Its dividend aristocrat status boosts investors’ confidence. Genuine Parts approved a $3.58 per share annual dividend for 2022, representing its 66th consecutive annual increase in the dividend. GPC envisions 2022 free cash flow in the band of $1.2-$1.4 billion, calling for a surge from $992 million generated in 2021.
The Zacks Consensus Estimate for GPC’s 2022 and 2023 sales implies year-over-year growth of 14.3% and 3.16%, respectively. The consensus mark for 2022 and 2023 earnings signals a year-over-year improvement of 15.3% and 6.6%, respectively. Genuine Parts— currently carrying a Zacks Rank #3 (Hold) and has a Value Score of B— has topped earnings estimates in the trailing four quarters.
LKQ: Headquartered in Illinois, LKQ is one of the leading providers of replacement parts, components and systems. Buyouts of Elite Electronics, Green Bean Battery, SeaWide Marine Distribution, Greenlight and Fabtech Industries have bolstered the firm’s product offerings as well as sales. Its focus on cost discipline and simplification of its operating model are likely to result in sustained margin expansion. Low leverage and high liquidity of the firm increase its financial flexibility and lower default risk. As a show of its solid cash flow generation ability and balance sheet strength, the company declared its first-ever dividend in October 2021. It also boosted its buyback authorization to $2.5 billion in May.
The Zacks Consensus Estimate for LKQ’s 2022 and 2023 earnings per share is pegged at $3.93 and $4.17, respectively. The consensus mark for 2022 and 2023 sales is $13.01 billion and $13.23 billion, respectively. The company surpassed earnings estimates in the last four quarters. LKQ currently carries a Zacks Rank #3 and has a Value Score of A.
Price and Consensus: LKQ
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Stay Ahead of Industry Odds With These 2 Auto Replacement Stocks
Chip crunch and supply chain chaos are weighing on the Zacks Automotive- Replacement Parts industry. The industry is also battling cost headwinds. While future mobility is creating opportunities, it’s bringing its own set of problems for the companies in the form of high capex and R&D expenses, thereby resulting in erosion of margins. Companies should work on developing parts and components in a cost-effective way that will drive sales and help them maintain market share. The increasing average age of vehicles seems to be the only catalyst in an otherwise gloomy auto replacement parts industry. Firms like Genuine Parts Company (GPC - Free Report) and LKQ Corporation (LKQ - Free Report) appear better positioned to tide over the challenges.
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 splurge on new ones. Consumers can either opt for repairing vehicles on their own or can avail professional services for the same. The industry is undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
Key Factors Shaping the Industry
Chip Crisis and Supply Chain Snarls Play Spoilsport: A major near-term threat to the auto replacement parts industry is a shortage in the supply of semiconductors— a byproduct of COVID-19 that only worsened with the Russia-Ukraine war. The 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. Logistical challenges and disruptions in the supply chain systems are keeping the prospects of the industry muted.
High Commodity & Operating Costs Dent Margins: Costs of raw materials like steel and non-ferrous metals are on the rise due to chip famine, further impacting the gross margins of auto replacement firms. Commodity inflation is not likely to abate anytime soon and will act as a major speed bump for quite some time. Additionally, the auto replacement parts industry is bearing high costs for developing technologically advanced auto components amid the soaring popularity of EVs, which is likely to weigh on profits further.
Increasing Age of Vehicles Act as a Silver Lining: Amid all the gloom and doom, the only bright spot seems to be the longevity of vehicles. The average age of U.S. vehicles has hit a new record of 12.2 years. In a bid to ensure the long-term functioning of the aging vehicles, customers will more likely spend on repairs, thereby driving the business of auto replacement and repair companies. Also, amid economic uncertainty, customers are more likely to opt for repairing old vehicles rather than splurging on new vehicles that are highly-priced.
Zacks Industry Rank Signals Glum Prospects
The Zacks Automotive – Replacements Parts industry is a seven-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #214, which places it in the bottom 15% 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. Since March, the industry’s earnings estimates for 2022 have moved 2.4% south.
Despite the industry’s dim near-term outlook, we will present two stocks worth considering for your portfolio. But before that, let's take a look at the industry’s stock market performance 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 2.5% against the sector and the S&P 500’s decline of 15.6% and 13.2%, 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 8.72X compared with the S&P 500’s 12.30X and the sector’s trailing-12-month EV/EBITDA of 15.28X. Over the past five years, the industry has traded as high as 15.08X, as low as 6.76X and at a median of 10.45X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks Braving Industry Challenges
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. The acquisitions of PartsPoint and Alliance Automotive Group, and the possession of full ownership in Inenco have bolstered the company’s growth. Its dividend aristocrat status boosts investors’ confidence. Genuine Parts approved a $3.58 per share annual dividend for 2022, representing its 66th consecutive annual increase in the dividend. GPC envisions 2022 free cash flow in the band of $1.2-$1.4 billion, calling for a surge from $992 million generated in 2021.
The Zacks Consensus Estimate for GPC’s 2022 and 2023 sales implies year-over-year growth of 14.3% and 3.16%, respectively. The consensus mark for 2022 and 2023 earnings signals a year-over-year improvement of 15.3% and 6.6%, respectively. Genuine Parts— currently carrying a Zacks Rank #3 (Hold) and has a Value Score of B— has topped earnings estimates in the trailing four quarters.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: GPC
LKQ: Headquartered in Illinois, LKQ is one of the leading providers of replacement parts, components and systems. Buyouts of Elite Electronics, Green Bean Battery, SeaWide Marine Distribution, Greenlight and Fabtech Industries have bolstered the firm’s product offerings as well as sales. Its focus on cost discipline and simplification of its operating model are likely to result in sustained margin expansion. Low leverage and high liquidity of the firm increase its financial flexibility and lower default risk. As a show of its solid cash flow generation ability and balance sheet strength, the company declared its first-ever dividend in October 2021. It also boosted its buyback authorization to $2.5 billion in May.
The Zacks Consensus Estimate for LKQ’s 2022 and 2023 earnings per share is pegged at $3.93 and $4.17, respectively. The consensus mark for 2022 and 2023 sales is $13.01 billion and $13.23 billion, respectively. The company surpassed earnings estimates in the last four quarters. LKQ currently carries a Zacks Rank #3 and has a Value Score of A.
Price and Consensus: LKQ