The outlook for the Zacks Automotive - Original Equipment industry remains challenged, weighed down by macroeconomic headwinds and tariff-related demand volatility. The pull-forward in vehicle sales earlier this year, driven by tariff fears, is expected to result in a slowdown in the coming months, pressuring order volumes for equipment suppliers. While the shift toward electric and autonomous vehicles offers long-term growth potential, it also demands heavy investments in R&D, which may strain margins, especially for smaller players. On top of that, managing rising production and labor costs has become critical amid tightening profit margins. Despite these challenges, companies like Allison Transmission Holdings (ALSN Quick QuoteALSN - Free Report) , Strattec Security (STRT Quick QuoteSTRT - Free Report) and Luminar Technologies (LAZR Quick QuoteLAZR - Free Report) are positioned well for growth.

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 the 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, rapid globalization is opening up 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.

Key Themes Defining the Industry's Fate

Vehicle Sales to Decline Amid Tariff Woes: U.S. auto sales surged earlier this year as buyers rushed to beat potential price hikes following new tariffs. But that early demand is now fading. With the initial rush behind us, May 2025 sales are projected at 1.47 million units, putting the seasonally adjusted annual rate at 15.7 million, down from the 17.6 million average seen in March and April, according to S&P Global Mobility. Automakers are racing to get vehicles out, but ongoing tariff challenges are clouding the outlook. Sales momentum is expected to decline further in the coming months. This does not augur well for auto equipment manufacturers, whose performance is closely tied to vehicle sales.

Technological Innovation: The auto equipment industry is being reshaped by the rapid shift toward electric and autonomous vehicles. As automakers push for cleaner, smarter, and more fuel-efficient transportation, component suppliers are under pressure to innovate. This includes developing high-performance batteries, sensors, lightweight materials, and software systems. These trends are creating opportunities for suppliers that can design and deliver cutting-edge components. The race to electrify and automate vehicles is reshaping the competitive landscape, forcing traditional parts makers to evolve quickly and align their products with the vehicles of the future.

Cost Management is Key: While innovation brings growth, it also comes with rising costs. As suppliers develop advanced technologies for electric, autonomous, and fuel-efficient vehicles, they face rising expenses tied to R&D, skilled labor and retooling production lines. Adding new features and meeting evolving performance standards often comes with a high upfront investment. In this environment, streamlining operations and improving supply chain efficiency are critical. Suppliers that can manage production and expansion costs effectively will protect their margins while delivering the innovation automakers need.

Zacks Industry Rank Not Promising

The Zacks Automotive – Original Equipment industry is placed within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #146, which places it in the bottom 40% 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 dull 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 a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence about this group’s earnings growth potential.Year to date, the industry’s earnings estimates for the current year have declined 9%.

Before we present a few stocks that you may still want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags Sector and S&P 500

Over the past year, the Zacks Original Equipment industry has underperformed the broader Auto sector and the Zacks S&P 500 composite. The industry has lost 10% against the sector and S&P 500’s growth of 15% and 12%, 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 the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 18.43X compared with the S&P 500’s 16.65X and the sector’s 21.93X.

Over the past five years, the industry has traded as high as 23.79X, as low as 5.89X and at a median of 13.50X, as the chart below shows.

EV/EBITDA Ratio (Past Five Years)

 

3 Stocks to Watch

Strattec Security: It is a key supplier of automotive access and security solutions, working with major automakers like General Motors, Ford and Stellantis. These three customers make up over 65% of the company’s sales. Strattec Security is seeing strong demand for its products and continues to launch new ones.

To stay competitive, the company has been cutting costs. In the first nine months of fiscal 2025, it reduced its workforce by 12%, including restructuring efforts in Mexico. It also eliminated a production shift at its Milwaukee plant. These moves are part of a larger plan to improve efficiency. Together, the restructuring efforts are expected to save STRT about $5 million each year. The full impact of these savings should be seen by early fiscal 2026. With strong demand and cost-saving actions in place, Strattec Security is positioning itself for long-term growth.

STRT currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its fiscal 2025 and 2026 bottom line implies year-over-year growth of 8% each. The consensus mark for Strattec Security’s fiscal 2025 and 2026 EPS has moved up 73 cents and 91 cents, respectively, over the past 30 days.

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

Price & Consensus: STRT

Luminar Technologies: It is an automotive tech company focused on LiDAR sensors and software for self-driving cars. Luminar Technologies is shifting its focus to a new, unified LiDAR platform called Halo. This system offers faster deployment, lower development costs and better scalability compared to its older Iris model. Automakers are already testing Halo prototypes, with a full launch expected in late 2026 or early 2027. This move could help LAZR become a top supplier of LiDAR for advanced driver-assistance systems and vehicle safety.

Financially, Luminar Technologies is on firmer ground. It has about $400 million in liquidity and has cut its debt to $135 million. The company also bought back $50 million of its 2026 convertible notes and secured $200 million in new funding. These steps give LAZR enough cash to continue developing Halo and growing its business.

Luminar Technologies currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its 2025 and 2026 bottom line implies year-over-year growth of 54% and 7.5%, respectively. The consensus mark for LAZR’s 2025 and 2026 loss per share has narrowed by $2.07 and 61 cents, respectively, over the past 30 days.

Price & Consensus: LAZR

Allison Transmission: It makes fully automatic transmissions for medium- and heavy-duty commercial trucks and U.S. defense vehicles. The company is well-placed to benefit from rising global defense spending. A key addition, the 3040MX transmission, expands ALSN’s defense lineup and opens doors for international growth. In North America, demand for Class 8 vocational trucks remains strong, driving solid revenue growth in 2024.

Allison Transmission expects this momentum to continue into 2025. Its focus on advanced technology and innovation, like the eGen Power electric axle products, helps it stay ahead of the competition. Allison Transmission continues to reward shareholders. Earlier this year, the company announced an 8% increase to its quarterly dividend—its sixth consecutive annual raise—and a $1 billion boost to its stock repurchase authorization. These moves reflect confidence in the company’s long-term outlook.

Allison Transmission currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2025 and 2026 bottom line implies year-over-year growth of 6.3% and 11.5%, respectively. The consensus mark for ALSN’s 2025 and 2026 EPS has improved by 54 cents and 53 cents, respectively, over the past 30 days.

Price & Consensus: ALSN