Prospects of the Zacks
Automotive - Original Equipment industry appear muted as the chip crisis and supply chain snafus persist, adversely impacting sales. The industry players are likely to suffer from rising prices of raw materials, manufacturing inefficiencies, high freight costs and logistic challenges. While evolving technologies and rising demand for electrified vehicles offer new opportunities, rising R&D expenses are playing a spoilsport. In the near term, most auto equipment manufacturers are likely to have a tough time in balancing their revenue generation, given broader challenges and escalating expenses. In a scenario wherein cost management holds the key, industry operators like Allison Transmission Holdings ( ALSN Quick Quote ALSN - Free Report) , ChargePoint Holdings ( CHPT Quick Quote CHPT - Free Report) and CarParts.com Inc. ( PRTS Quick Quote PRTS - Free Report) seem relatively stronger to fend off the headwinds. Industry Overview
The Zacks Automotive - Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering, and suspension as well as brakes. Demand for original equipment depends directly on the sale of vehicles, which, in turn, is heavily reliant on economic growth and consumer confidence. Importantly, the rapidly globalizing world is opening newer avenues for auto-equipment manufacturers who need to adapt to the changing dynamics through systematic research and development. From a future competitive standpoint, the industry players need to focus on technologies that offer the best value in a short span of time to the market.
What's Shaping the Industry's Prospects?
: Supply chain challenges are the most significant headwind for the industry. Auto equipment manufacturers are dependent on microchips and a shortfall of the same is adversely impacting the sales of the industry participants, inducing lost revenues. Chip-related headwinds are likely to persist in the near term. Shortage of raw materials and electronic components, labor constraints and logistics challenges, including air and ocean freight and port delays are hindering business operations of the auto equipment manufacturers. Supply-Chain Constraints : The industry players are also likely to suffer from escalating prices of raw materials. Soaring costs of commodities like resin, steel, copper and aluminum have increased the manufacturing costs of the companies. Most industry players have acknowledged that the increasing cost of raw materials is set to impact their margins. Further, most industry participants have a global presence, which makes them more vulnerable to forex woes. Adverse foreign currency translations are also likely to impact earnings and margins. Cost Woes Put Pressure on Margins
: Although advanced technologies and the soaring popularity of electric and connected vehicles are providing new opportunities to the industry, they are anticipated to strain the near-term financials of companies. With the technology shift in full swing, original equipment manufacturers must develop and upgrade their offerings to remain on par with the evolving trends in the automotive market. The new features, upgrades and component designs call for abundant capital, which is likely to clip near-term cash flows. Electrification Both a Boon & Bane Zacks Industry Rank Paints Gloomy Picture
The Zacks Automotive – Original Equipment industry is a 61-stock group within the broader Zacks
Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #155, which places it in the bottom 38% of around 250 Zacks industries.
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates tepid 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 bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for 2022 have declined 52.3%.
Despite the murky scenario, we will present a few stocks that you may invest in, given their growth endeavors. But before that, it’s worth looking at the industry’s performance and current valuation.
Industry Lags S&P 500, Tops Sector
Over the past year, the Zacks Original Equipment industry has underperformed the Zacks S&P 500 composite but outperformed the broader Auto sector. The industry has declined 38% compared with the sector and S&P 500’s decline of 48.7% and 17.4%, 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.
Based on the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 21.54X compared with the S&P 500’s 11.97X and the sector’s 12.96X.
Over the past five years, the industry has traded as high as 22.38X, as low as 3.76X and at a median of 7.50X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
3 Stocks to Buy
CarParts.com:Headquartered in California, CarParts.com offer e-commerce automotive aftermarket, providing collision, engine and performance parts and accessories. The firm’s CEO David Meniane’s sharp focus on operational discipline is bearing fruits.CarParts.com has been successfully passing the rising costs of raw materials to customers through smart pricing actions.Expanded capacity at its Grand Prairie distribution center has not just boosted the inventory of brand partners but also created more space for CarParts.com's premium brands like TrueDrive, DriveWire, DriveMotive, JC Whitney and SureStop brake product line.
The Zacks Consensus Estimate for PRTS’s 2022 earnings and sales implies year-over-year growth of 85% and 13%, respectively. CarParts.com currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of B. The company topped earnings estimates in the trailing four quarters, the average surprise being 101.3%.
Price and Consensus: PRTS Allison: Headquartered in Indianapolis, Allison is the world's largest manufacturer of fully automatic transmissions for medium-and heavy-duty commercial vehicles. Frequent product launches, including FracTran, TerraTran and the 3414 Regional Haul Series fully automatic transmission, underscore the company’s commitment toward innovation. Speedy developments in the eGen Power unit promise growth opportunities. Strategic buyouts of Walker Die, C&R Tool & Engineering, Vantage Power, the Off-Highway transmission portfolio of AVTEC and AxleTech’s electric vehicle (EV) systems division are set to boost Allison’s long-term prospects.
The Zacks Consensus Estimate for ALSN’s 2022 earnings and sales implies year-over-year growth of 26% and 13%, respectively. Allison currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The company topped earnings estimates in three of the trailing four quarters and missed on the other, the average surprise being 10.3%.
Price and Consensus: ALSN ChargePoint: This charging company, based in California, is the market leader in North America in commercial Level 2 AC chargers. It is also actively focusing on expansion into European markets. CHPT currently has more than 200,000 activated charging ports in North America and Europe. The acquisitions of has·to·be and Viriciti have accelerated CHPT’s position in the EV charging ecosystem. Strategic collaborations with Sonepar, Gatik, Wheels Donlen and others augur well. Last month, CHPT launched CP6000— the company’s most flexible and serviceable global AC EV charging solution. For fiscal 2023, ChargePoint envisions revenues in the band of $450- $500 million, implying 96% year-over-year growth at the midpoint of the guidance.
The Zacks Consensus Estimate for CHPT’s fiscal 2023 and 2024 sales implies year-over-year growth of 100.2% and 54%, respectively. The consensus mark for fiscal 2023 and 2024 bottom line signals a year-over-year improvement of 54% and 26%, respectively. ChargePoint currently carries a Zacks Rank #2.
Price and Consensus: CHPT