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High Costs Hurt Auto Replacement Parts Industry's Prospects

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The Zacks Automotive- Replacements 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 and accessorize vehicles. A few of the important auto replacement parts include engine, steering, drive axle, suspension, brakes and gearbox parts.

Per a report by Cerasis, the current combined average age of passenger cars and light trucks is 11.3 years, up 14% from 2007. In a bid to ensure long-term functioning of the aging vehicle population, customers are making investments to replace faulty vehicle parts and components. This has boosted demand for auto replacement parts.

Let’s take a look at the industry’s three major themes:

  • The auto industry is witnessing increasing demand for hybrid electric cars that will eventually drive demand for auto parts and specific tools. Government regulations to choose environment-friendly vehicles that comply with emission standards are leading to a phase change in auto parts replacement sales. Surging demand for dedicated auto components will boost the top line of industry players.
     
  • Development of technically-enhanced components along with high tariff charges on aluminum and steel sourced from outside the United States has increased manufacturing costs of replacement parts and components. The worries will increase further if the United States slaps tariff charges on imports from Mexico starting next month. The industry’s bottom line will be under pressure if the players fail to transfer the cost burden to customers.
     
  • Rising disposable income in developing nations such as China and Brazil is expected to have a positive impact on auto replacement industry’s growth. Further, U.S. customers are expected to opt for repairing old vehicles rather than splurging on new vehicles that are priced at record-high levels.


Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Automotive – Replacement Parts industry is an eight-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #177, which places it in the bottom 31% of more than 250 Zacks industries.

The group’s 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. In the past year, the industry’s earnings estimate for the current year has declined 5%.

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

Industry Outpaces Sector, Lags S&P 500

Over the past year, the Zacks Automotive – Replacement Parts industry has performed better than the broader Auto sector but lagged the Zacks S&P 500 composite. The industry has declined 3.5% over this period compared with the broader sector’s decrease of 22.3%. The S&P 500 has risen 2.7% in the said time frame.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), which is the commonly used multiple for valuing auto stocks, the industry is currently trading at 12.48X compared with the S&P 500’s 10.97X and the sector’s 8.86X.

Over the past five years, the industry has traded as high as 16.36X, as low as 11.39X and at a median of 13.53X, as the chart below shows.

EV/ EBIDTA Ratio (TTM)

 

EV/ EBIDTA Ratio (TTM)

 

Bottom Line

Advancements in automotive technology have brightened prospects of replacement parts suppliers. Further, rocketing new vehicle prices provide ample opportunity for industry players to improve their top line. However, the companies have to manage their mounting manufacturing and tariff-related costs. Also, transferring escalating costs to customers by raising auto replacement parts price might hamper consumers’ buying decision.

In a nutshell, industry players should work on developing parts and components in a cost-effective way that will drive sales and help them to maintain market share.

Currently, the Zacks Automotive – Replacement Parts industry does not have any stock with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

We are presenting a few stocks with a Zacks Rank #3 (Hold) that have solid long-term growth potential.

LKQ Corporation (LKQ - Free Report) : This provider of replacement parts, components, and systems to repair and maintain vehicles has gained 5.9% in the past six months. The Zacks Consensus Estimate for 2019 earnings per share has remained unchanged at $2.38 over the past 30 days.

Price and Consensus:

 

SPX Corporation (SPXC - Free Report) : This Charlotte, NC based global supplier of infrastructure equipment has witnessed no change in the consensus EPS estimate of $2.60 for the current year over the past 30 days. The stock has gained 14.8% in the past six months.

Price and Consensus:

 

Dorman Products, Inc. (DORM - Free Report) : The consensus estimate for current-year EPS of this leading supplier in the automotive aftermarket has remained unchanged at $4.43 over the past 30 days. This stock has rallied 4% in the past three months.

Price and Consensus:

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Dorman Products, Inc. (DORM) - free report >>