Zacks Automotive- Replacement Parts industry is reeling under chip crunch and supply chain disruptions, which are likely to limit sales. Additionally, increasing cost of raw materials, adverse foreign exchange translations and high research and development expenses are clipping margins. Seemingly, the only silver lining is the increasing longevity of vehicles. In an otherwise gloomy industry, Genuine Parts Company ( GPC Quick Quote GPC - Free Report) and LKQ Corporation ( LKQ Quick Quote LKQ - Free Report) appear better-positioned, thanks to their strategic buyouts and investor-friendly moves. About the Industry
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 Themes Deciding the Industry's Fate
: Costs of raw materials like steel and non-ferrous metals are on the rise. Commodity inflation is not likely to abate anytime soon and will act as a major speed bump for quite some time. Industry players acknowledge 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. Commodity Inflation & Forex Woes : The industry is bearing high costs for developing technologically advanced auto components amid the soaring popularity of electric vehicles, which is likely to weigh on profits further. With the technology shift in full swing, industry players must develop and upgrade their offerings to remain on par with the evolving trends in the automotive market. The new features and upgrades call for high capex and research and development expenses, which are likely to limit operating margins and cash flows. Rising Operational Costs : The industry is battling semiconductor shortage— a byproduct of COVID-19 that only worsened with the Russia-Ukraine war. The deficit of microchips is hindering the business operations of the industry participants and the chip crunch is not likely to end anytime soon, in turn resulting in lost revenues. Logistical challenges and disruptions in the supply chain systems are clouding the prospects of the industry. Supply Chain Snarls
: One comforting prospect of the industry is the increasing average age 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 expensive new vehicles. Aging Vehicles Zacks Industry Rank Paints Gloomy Picture
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 #185, which places it in the bottom 26% of around 250 Zacks industries.
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 April, the industry’s earnings estimates for 2022 have moved south by 3.5%.
Despite the industry’s dim near-term outlook, we will present two stocks worth considering for your portfolio. But before that, let's look at the industry’s stock market performance and current valuation.
Industry's Decline Narrower than S&P 500 & Sector
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 declined 1.3% against the sector and the S&P 500’s decline of 45.8% and 15.1%, 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 trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 9.27X compared with the S&P 500’s 12.21X and the sector’s trailing-12-month EV/EBITDA of 13.43X. Over the past five years, the industry has traded as high as 15.08X, as low as 6.76X and at a median of 10.02X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Keep a Close Eye On
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 KDG and Inneco acquisitions have bolstered the company’s Industrial segment. Other strategic bolt-on acquisitions, including Winparts, Rare Spares, PartsPoint and Alliance Automotive Group are adding to the top-line growth of the Automotive segment. GPC’s dividend aristocrat status boosts investors’ confidence. The company 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 16% and 2.5%, respectively. The consensus mark for 2022 and 2023 earnings signals a year-over-year improvement of 18% and 6%, respectively. Genuine Parts— currently carrying a Zacks Rank #2 (Buy) and having a Value Score of A—topped earnings estimates in the trailing four quarters.
Price and Consensus: GPC LKQ Corp: Headquartered in Illinois, LKQ is one of the leading providers of replacement parts, components and systems. The buyouts of Bumblebee Batteries, Elite Electronics, Green Bean Battery, SeaWide Marine Distribution, Greenlight and Fabtech Industries have bolstered the firm’s product offerings as well as sales. 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 recently hiked its dividend by 10% from the prior payout and boosted buyback by $1 billion. Between the period of initiating the stock buyback program in late October 2018 to Sep 30, 2022, LKQ repurchased around $2.2 billion worth of stock.
The Zacks Consensus Estimate for LKQ’s 2023 earnings per share is pegged at $4.18, implying 6.6% growth year over year. The consensus mark for 2023 EPS has moved north by 2 cents a share to $4.18. The company surpassed earnings estimates in the last four quarters, the average surprise being 8%. LKQ currently carries a Zacks Rank #3 (Hold) and has a Value Score of A.
Price and Consensus: LKQ