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2 Auto Parts Retailers Worth Watching on Industry Strength

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The Zacks Automotive-Retail and Wholesale-Parts industry is benefiting from ongoing vehicle demand and the increasing age of vehicles. Additionally, the rise of technologically advanced vehicles has increased consumer dependence on professional services, creating new opportunities for industry players. To capitalize on these opportunities, auto parts retailers need to devise comprehensive strategies. Effective cost management is crucial in this dynamic market environment. Noteworthy industry participants worth watching include O’Reilly Automotive (ORLY - Free Report)  and AutoZone (AZO - Free Report) .

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

Vehicle Sales Growth to Aid Parts Market: New vehicle sales in the United States surged to their highest levels in 2023 since 2019, propelled by pent-up demand, strengthened inventories, attractive incentives and increased fleet sales. While the growth rate is expected to moderate, as much of the pent-up demand was satisfied in 2023, sales are still projected to see year-over-year growth. Last month, vehicle sales reached a seasonally adjusted annual rate of 15.9 million units, up from April's 15.8 million. Cox Automotive forecasts U.S. auto sales to reach 15.7 million vehicles in 2024, indicating a 1.3% increase annually. With the uptick in vehicle sales, demand for auto retail and wholesale parts is also expected to rise, providing a boost to industry participants.

Aging Vehicles to Serve as a Catalyst: The average age of U.S. vehicles hit a new record of 12.6 years in 2024, an increase of two months from 2023. This marks the seventh consecutive year of rising average vehicle age in the United States. The growth in the average age of light vehicles is providing a boost to the automotive wholesale and retail parts industry. In tandem with the rising average vehicle age, the industry is experiencing growth as consumers allocate more resources to sustain the operation of their aging automobiles. Consequently, there has been a surge in the demand for automotive parts.

Technology Progress Creating Fresh Avenues: The industry is experiencing a significant transformation, driven by shifting customer demands and revolutionary technological advancements. The emergence of sophisticated and advanced vehicles has led consumers to seek professional assistance over traditional do-it-yourself methods. The widespread adoption of technology and rapid digitization are fundamentally reorganizing the automotive market. This transformation is further propelled by the implementation of omnichannel marketing and accelerated digitization, which are driving sales growth.

Zacks Industry Rank Depicts Solid Outlook

The Zacks Auto Retail & Wholesale Parts industry is within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #53, which places it in the top 21% 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 bright 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 optimistic about this group’s earnings growth potential.

Before we present a few stocks that could be on your watchlist, let’s take a look at the industry’s shareholder returns and current valuation first.

Industry Lags S&P 500, Tops Sector

The Zacks Auto Retail and Wholesale Parts industry has outperformed the Auto, Tires and Truck sector but underperformed the Zacks S&P 500 composite over the past year. The industry has gained 4% over this period compared with the S&P 500’s growth of 23%. The sector has declined 16.5% in the said time frame.

One-Year Price Performance

Industry's Current Valuation

Since automotive companies are debt-laden, it makes sense to value them based on the Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) ratio.

Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 64.85X compared with the S&P 500’s 14.77X and the sector’s 14.39X.

Over the past five years, the industry has traded as high as 75.93X and as low as 15.90X, with the median being 25.27X, as the chart below shows.

EV/EBITDA Ratio (Past 5 Years)


2 Stocks to Watch

O’Reilly is a leading specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The company has been generating record revenues for 31 consecutive years. The trend is likely to continue on the back of growth in the auto parts market, vehicle longevity, store expansion, a strong distribution network and a customer-centric business model.

O’Reilly expects both DIY and professional businesses to be positive contributors to sales growth in 2024, with professionals expected to outperform. The company’s efforts to expand internationally with the buyouts of Mayasa Auto Parts and Groupe Del Vasto have further bolstered prospects. ORLY’s robust stock buyback also instills confidence.

The company currently carries a Zacks Rank #3 (Hold) and has a Value Score of B. The Zacks Consensus Estimate for ORLY's 2024 sales and EPS implies year-over-year growth of 7% and 9%, respectively. The consensus mark for 2025 sales and EPS points to another 6% and 11% uptick, respectively, from the estimated 2024 projections. In the trailing four quarters, O’Reilly surpassed earnings estimates on all occasions.

Price & Consensus: ORLY

AutoZone is one of the leading specialty retailers and distributors of automotive replacement parts and accessories in the United States.AutoZone expects continued strength across its DIY as well as commercial business amid the expansion of coverage and parts availability. AutoZone's distribution network transformation, highlighted by the strategy to bring inventory closer to customers, will enhance efficiency and drive growth with increased availability and speed.

AutoZone is streamlining operations to improve efficiency, reduce delivery times and enhance the effectiveness of its sales force. Also, the company’s disciplined capital allocation approach to reinvest in the business and engage in meaningful investor-friendly moves is praiseworthy. 

The company currently carries a Zacks Rank #3 and has a Value Score of B. The Zacks Consensus Estimate for AZO's 2024 sales and EPS implies year-over-year growth of 6% and 14.5%, respectively. The consensus mark for 2025 sales and EPS points to another 3% and 8% uptick, respectively, from the estimated 2024 projections. In the trailing four quarters, AutoZone surpassed earnings estimates on all occasions.

Price & Consensus: AZO

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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O'Reilly Automotive, Inc. (ORLY) - free report >>

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