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2 Stocks to Profit From Auto Retail Parts Industry Trends
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Robust pent-up demand for vehicles, coupled with improved inventory levels, is bolstering the outlook for the Zacks Automotive - Retail and Wholesale - Parts industry. The introduction of sophisticated and high-tech vehicles has driven consumers toward professional assistance, creating fresh avenues for industry participants. In adapting to the evolving market landscape, the auto retail parts sector must chart a comprehensive roadmap to maximize these opportunities. Companies such as O’Reilly Automotive (ORLY - Free Report) and AutoZone (AZO - Free Report) are poised to navigate and thrive in this dynamic industry environment.
Industry Overview
The Zacks Automotive - Retail and Wholesale - Parts industry players execute several functions. These include manufacturing, retailing, distribution and installation of vehicle parts, equipment and accessories. Vehicle parts and accessories include seat covers, antifreeze, engine additives, wiper blades, batteries, brake system components, belts, chassis parts, driveline parts, engine parts and fuel pumps. Consumers have two options. They can either 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 highly competitive and undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
Factors at Play
Soaring Vehicle Sales to Rev Up Auto Parts Demand: Per Cox Automotive, U.S. new vehicle sales in 2023 are projected to increase 10% year over year, marking the highest levels since 2019, driven by heightened pent-up demand for personal mobility, improved inventory levels and the introduction of appealing vehicle models. Auto parts retailers stand to benefit as the upswing in new vehicle demand correlates with an increased need for parts and accessories. As vehicle sales increase, the demand for both retail and wholesale auto parts experiences a concurrent rise, providing a positive outlook for industry participants. Furthermore, the Federal Reserve's decision to maintain a stable interest rate and the anticipation of future cuts in 2024 enhance the industry landscape, fostering a lower cost of vehicle financing and bolstering the auto parts sector.
Technology Progress and Digitization to Propel Growth: The ongoing transformation in the auto retail parts industry, fueled by changing customer preferences and technological advancements, presents a promising landscape for growth. The shift toward sophisticated vehicles has elevated the demand for professional assistance. Extensive digitization and the implementation of omnichannel marketing strategies are reshaping the industry fundamentally. This change benefits auto retail parts because it aligns with the industry's move toward modernization. With consumers increasingly relying on professional services and the seamless integration of technology, the industry is well-positioned to capitalize on these trends and is primed for sales growth.
Cost Headwinds Remain: Although inflation is cooling down, it is still way above the Fed’s target. The combination of an inflationary environment and supply chain constraints is driving up operational costs, impacting profit margins. Rising expenses, exacerbated by distribution inefficiencies, labor difficulties and global logistics issues, are putting pressure on industry players.Also, the shift toward complex vehicles is resulting in higher capex and R&D costs. The adoption of omnichannel marketing and digitalization is driving up operational costs, potentially curbing profit margins. The industry must strategically outline a comprehensive plan to capitalize on these opportunities amid a shifting market landscape.
Zacks Industry Rank Signals Encouraging Picture
The Zacks Auto Retail & Wholesale Parts industry is within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #92, which places it in the top 37% 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 encouraging 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 getting optimistic about this group’s earnings growth potential. Over the past month, the industry’s earnings estimate for 2023 has inched up 0.12%.
Before we present a few stocks that should be on your watchlist, let’s take a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms Sector & S&P 500
The Zacks Auto Retail and Wholesale Parts industry has underperformed the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has gained 3.9% over this period compared with the S&P 500 and the sector’s growth of 16.7% and 16.8%, 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 63.45X compared with the S&P 500’s 13.43X and the sector’s 13.89X.
Over the past five years, the industry has traded as high as 67.51X and as low as 15.90X, with the median being 24.35X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
2 Stocks To Watch
O'Reilly: It is one of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The company has been generating record revenues for 30 consecutive years due to growth in the auto parts market and store expansion efforts. For 2023, O’Reilly projects total revenues in the $15.7-$15.8 billion band, up from $14.41 billion in 2022. ORLY is poised to benefit from store openings and distribution centers in profitable regions. The company’s dual-market strategy and strong distribution network bode well. O’Reilly’s wide-ranging product portfolio caters to DIY and DIFM customers, driving comparable store sales growth. Strong cash flow generation supports the firm’s robust buyback program, thereby boosting investors’ confidence.
O’Reilly currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2023 earnings and sales indicates a year-over-year uptick of 14.3% and 9.7%, respectively. The consensus mark for 2024 EPS and revenues suggests year-over-year growth of 10.6% and 5.6%, respectively. ORLY pulled off earnings beat in each of the last four quarters, the average surprise being 4.31%.
Price & Consensus: ORLY
AutoZone: It is one of the leading specialty retailers and distributors of automotive replacement parts and accessories in the United States. It has been generating record revenues for 34 straight years and the trend is expected to continue. The company’s high-quality products, store-expansion initiatives and omni-channel efforts to improve customer shopping experience are boosting its market share. Expanded hub and mega-hub rollouts, along with the expansion of the distribution center footprint, bode well. The ramp-up of e-commerce efforts is driving traffic to the company’s website, thereby helping the company to deliver growth. AutoZone’s solid share repurchase program also sparks optimism.
AutoZone currently carries a Zacks Rank #3. The Zacks Consensus Estimate for its fiscal 2024 earnings and sales indicates a year-over-year uptick of 13.5% and 6.6%, respectively. The consensus mark for fiscal 2025 EPS and revenues suggests year-over-year growth of 8.7% and 3.3%, respectively. AZO pulled off earnings beat in the last four quarters, the average surprise being 8.8%.
Image: Bigstock
2 Stocks to Profit From Auto Retail Parts Industry Trends
Robust pent-up demand for vehicles, coupled with improved inventory levels, is bolstering the outlook for the Zacks Automotive - Retail and Wholesale - Parts industry. The introduction of sophisticated and high-tech vehicles has driven consumers toward professional assistance, creating fresh avenues for industry participants. In adapting to the evolving market landscape, the auto retail parts sector must chart a comprehensive roadmap to maximize these opportunities. Companies such as O’Reilly Automotive (ORLY - Free Report) and AutoZone (AZO - Free Report) are poised to navigate and thrive in this dynamic industry environment.
Industry Overview
The Zacks Automotive - Retail and Wholesale - Parts industry players execute several functions. These include manufacturing, retailing, distribution and installation of vehicle parts, equipment and accessories. Vehicle parts and accessories include seat covers, antifreeze, engine additives, wiper blades, batteries, brake system components, belts, chassis parts, driveline parts, engine parts and fuel pumps. Consumers have two options. They can either 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 highly competitive and undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
Factors at Play
Soaring Vehicle Sales to Rev Up Auto Parts Demand: Per Cox Automotive, U.S. new vehicle sales in 2023 are projected to increase 10% year over year, marking the highest levels since 2019, driven by heightened pent-up demand for personal mobility, improved inventory levels and the introduction of appealing vehicle models. Auto parts retailers stand to benefit as the upswing in new vehicle demand correlates with an increased need for parts and accessories. As vehicle sales increase, the demand for both retail and wholesale auto parts experiences a concurrent rise, providing a positive outlook for industry participants. Furthermore, the Federal Reserve's decision to maintain a stable interest rate and the anticipation of future cuts in 2024 enhance the industry landscape, fostering a lower cost of vehicle financing and bolstering the auto parts sector.
Technology Progress and Digitization to Propel Growth: The ongoing transformation in the auto retail parts industry, fueled by changing customer preferences and technological advancements, presents a promising landscape for growth. The shift toward sophisticated vehicles has elevated the demand for professional assistance. Extensive digitization and the implementation of omnichannel marketing strategies are reshaping the industry fundamentally. This change benefits auto retail parts because it aligns with the industry's move toward modernization. With consumers increasingly relying on professional services and the seamless integration of technology, the industry is well-positioned to capitalize on these trends and is primed for sales growth.
Cost Headwinds Remain: Although inflation is cooling down, it is still way above the Fed’s target. The combination of an inflationary environment and supply chain constraints is driving up operational costs, impacting profit margins. Rising expenses, exacerbated by distribution inefficiencies, labor difficulties and global logistics issues, are putting pressure on industry players.Also, the shift toward complex vehicles is resulting in higher capex and R&D costs. The adoption of omnichannel marketing and digitalization is driving up operational costs, potentially curbing profit margins. The industry must strategically outline a comprehensive plan to capitalize on these opportunities amid a shifting market landscape.
Zacks Industry Rank Signals Encouraging Picture
The Zacks Auto Retail & Wholesale Parts industry is within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #92, which places it in the top 37% 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 encouraging 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 getting optimistic about this group’s earnings growth potential. Over the past month, the industry’s earnings estimate for 2023 has inched up 0.12%.
Before we present a few stocks that should be on your watchlist, let’s take a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms Sector & S&P 500
The Zacks Auto Retail and Wholesale Parts industry has underperformed the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has gained 3.9% over this period compared with the S&P 500 and the sector’s growth of 16.7% and 16.8%, 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 63.45X compared with the S&P 500’s 13.43X and the sector’s 13.89X.
Over the past five years, the industry has traded as high as 67.51X and as low as 15.90X, with the median being 24.35X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
2 Stocks To Watch
O'Reilly: It is one of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The company has been generating record revenues for 30 consecutive years due to growth in the auto parts market and store expansion efforts. For 2023, O’Reilly projects total revenues in the $15.7-$15.8 billion band, up from $14.41 billion in 2022. ORLY is poised to benefit from store openings and distribution centers in profitable regions. The company’s dual-market strategy and strong distribution network bode well. O’Reilly’s wide-ranging product portfolio caters to DIY and DIFM customers, driving comparable store sales growth. Strong cash flow generation supports the firm’s robust buyback program, thereby boosting investors’ confidence.
O’Reilly currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2023 earnings and sales indicates a year-over-year uptick of 14.3% and 9.7%, respectively. The consensus mark for 2024 EPS and revenues suggests year-over-year growth of 10.6% and 5.6%, respectively. ORLY pulled off earnings beat in each of the last four quarters, the average surprise being 4.31%.
Price & Consensus: ORLY
AutoZone: It is one of the leading specialty retailers and distributors of automotive replacement parts and accessories in the United States. It has been generating record revenues for 34 straight years and the trend is expected to continue. The company’s high-quality products, store-expansion initiatives and omni-channel efforts to improve customer shopping experience are boosting its market share. Expanded hub and mega-hub rollouts, along with the expansion of the distribution center footprint, bode well. The ramp-up of e-commerce efforts is driving traffic to the company’s website, thereby helping the company to deliver growth. AutoZone’s solid share repurchase program also sparks optimism.
AutoZone currently carries a Zacks Rank #3. The Zacks Consensus Estimate for its fiscal 2024 earnings and sales indicates a year-over-year uptick of 13.5% and 6.6%, respectively. The consensus mark for fiscal 2025 EPS and revenues suggests year-over-year growth of 8.7% and 3.3%, respectively. AZO pulled off earnings beat in the last four quarters, the average surprise being 8.8%.
Price & Consensus: AZO
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.