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Aging Vehicles a Boon for Auto Replacement Parts Industry

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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.

Industry players in the S&P 500 include Genuine Parts Company (GPC - Free Report) and LKQ Corporation LKQ.

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

 

  • Per IHS Markit, the current combined average age of passenger cars and light trucks has hit a record of 11.8 years. The aging vehicles are a boon to the auto replacement and repair companies. 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. Also, amid growing concerns of economic slowdown, customers are expected to opt for repairing old vehicles rather than splurging on new vehicles that are highly priced.

 

  • A shift toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. The auto industry is witnessing increasing demand for hybrid electric cars that will eventually drive demand for auto parts and specific tools. Stricter 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. Further, widespread usage of technology and rapid digitalization are resulting in fundamental restructuring of the automotive market and the automotive replacement parts industry needs to develop a detailed roadmap to make the most out of the opportunities in a changing market scenario.

 

  • U.S.-Sino trade tensions are likely to weigh on the fortunes of the industry. 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. While a partial trade deal is currently being worked out between the two nations, new tariffs are likely to go into effect if no agreement is in place before Dec 15. The possibility of the imposition of new tariffs on automotive imports remains a concern. Suppliers’ incapability to absorb such high tariff-related costs will compel industry players to pass on the incremental price to consumers.The industry’s bottom line will be under pressure if the players fail to transfer the cost burden to customers.

Zacks Industry Rank Indicates Healthy 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 #101, which places it in the top 40% 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 strong 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

Before we present a few Auto Replacement Parts 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 Lags Sector and S&P 500

The Zacks Auto Replacement Parts industry has underperformed the Auto, Tires and Truck sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 2% over this period against the S&P 500 and broader sector’s rise of 8.1% and 3.7%, 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. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 12.21X compared with the S&P 500’s 11.15X and the sector’s trailing-12-month EV/EBITDA of 9.40X.

Over the past five years, the industry has traded as high as 16.32X, as low as 11.04X and at a median of 13.21X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

 

 

 

 


Bottom Line

Advancements in automotive technology have brightened prospects of replacement parts suppliers. Further, aging vehicles 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.

We are presenting one stock with a Zacks Rank #2 (Buy) that is well positioned to grow and one Ranked #3 (Hold) firm that investors may currently retain in their portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.

Standard Motor Products SMP: New York based Standard Motor is one of the leading manufacturers, distributors, and marketers of premium automotive replacement parts for engine management and temperature control systems. The company carries a Zacks Rank #2 and has an expected earnings growth rate of 21.96% for 2019.

Price and Consensus: SMP

Dorman Products DORM: Pennsylvania-based Dorman Products is a leading supplier of Dealer Exclusive replacement parts to the Automotive, Medium and Heavy Duty Aftermarkets. The company carries a Zacks Rank #3 and has an expected earnings growth rate of 30.53% for 2020.

Price and Consensus: DORM

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