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Bleak Near-Term Prospects 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.

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

  • A shift toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. Stricter emission standards are leading to a phase change in auto parts replacement sales. Widespread usage of technology and rapid digitization 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. While increasing demand for hybrid electric cars will drive demand for auto parts and specific tools, the auto replacement parts industry will have to bear high costs for developing those dedicated auto components. This is likely to result in erosion of margins.

 

  • The development of technically-enhanced components and tariff charges on aluminum and steel sourced from outside the United States will increase manufacturing costs of replacement parts, and components. Although the trade tiff seems to be easing gradually with a phase one trade deal between the United States and China, things will likely remain under pressure unless the dispute is fully resolved. The coronavirus epidemic is further denting the automotive replacement parts industry’s prospects. Importantly, a major chunk of vehicle parts and components is sourced from China. The shutdown in China amid the virus outbreak has disrupted the global supply chain, as vehicle makers are struggling to source the numerous parts required for building cars. Since it will take time to resume normalcy of operations in the country, automotive replacement parts companies are likely to take a beating in the near term.

 

  • That said, the current combined average age of passenger cars and light trucks hit a record of 11.8 years, per HIS Markit. The aging vehicles offer opportunities to 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 is likely to boost demand for auto replacement parts. 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.

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 #214, which places it in the bottom 16% 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 dull 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 position 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 estimates for the current year have declined 61.8%.

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 13.2% over this period against the S&P 500 and broader sector’s rise of 11.5% and 7.2%, 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 12X compared with the S&P 500’s 12X and the sector’s trailing-12-month EV/EBITDA of 9.14X.

Over the past five years, the industry has traded as high as 15.30X, as low as 11.22X and at a median of 13.03X, as the chart below shows.

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

 

Bottom Line

While aging vehicles and advancements in technology are likely to provide ample opportunities to the automotive replacement industry, the companies are likely to suffer from various near-term headwinds. They will 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. Shortage of supplies of parts and components from China amid coronavirus is likely to impede near-term prospects of the industry. Industry players should work on developing parts and components in a cost-effective way that will drive sales and help them maintain market share.

Despite the downbeat mood of the industry, we are presenting one stock with a Zacks Rank #2 (Buy) that is well positioned to gain amid the prevailing challenges. There are also three stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SPX Corporation (SPXC - Free Report) : North Carolina-based SPX Corporation currently carries a Zacks Rank #2 and has an expected earnings growth rate of 8.3% for 2020.

Price and Consensus: SPXC

Genuine Parts Company (GPC - Free Report) : Domiciled in Georgia, Genuine Parts currently carries a Zacks Rank #3 and has an expected earnings growth rate of 3.5% for 2020.

Price and Consensus: GPC

LKQ Corporation (LKQ - Free Report) : This Illinois-based firm currently carries a Zacks Rank #3 and has an expected earnings growth rate of 6.8% for 2020.

Price and Consensus: LKQ

Standard Motors Products, Inc. (SMP - Free Report) : Headquartered in New York, the company currently carries a Zacks Rank #3 and has an expected earnings growth rate of 11% for 2020.

Price and Consensus: SMP

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