We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Rough Ride Ahead for Auto Retail & Wholesale Parts Industry
Read MoreHide Full Article
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. Consumers have two options, either they can opt for repairing their 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).
Let’s take a look at the three major industry themes:
The Auto Retail and Wholesale Parts industry, being consumer cyclical, looks unfavorable at the moment. Lower production and supply chain disruptions due to the coronavirus outbreak has rattled the auto market. Amid coronavirus-induced uncertainty, consumers are putting off discretionary purchases like cars, in turn resulting in low demand for vehicles. This is likely to put pressure on near-term prospects of the auto retail and wholesale parts industry.
The Auto Retail & Wholesales Parts industry is undergoing radical change, with evolving customer expectations and technological innovation acting as game changers.A shift toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. Increase in the number of new, complicated and high-tech vehicles has compelled consumers to opt for more professional assistance instead of opting for DIY. Considering the changing dynamics, there has been a radical change in the business models of auto companies. This will impact the automotive retail and wholesale parts industry.
In the wake of the COVID-19 pandemic, companies are ramping up digital capabilities to make deals with customers and arrange for home deliveries of vehicles. While e-commerce efforts should compensate to some extent for lost store sales, escalated costs related to digital investments and competition may put pressure on margins.In a bid to preserve cash amid coronavirus-led reduced demand and financial crisis, companies are resorting to various cost-containment measures. Dividend cuts, buyback suspension, employee layoffs, pay cuts and hiring freezes are becoming commonplace.
Zacks Industry Rank Depicts Grim Scenario
The Zacks Auto Retail & Wholesale Parts industry is a five-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #223, which places it in the bottom 7% of more than 245 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 position in the bottom 7% 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 gradually losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates have moved 23.3% south.
Before we present a few Auto Retail & Wholesale 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 Underperforms Sector and S&P 500
The Zacks Auto Retail and Wholesale Parts industry has underperformed the Auto, Tires and Truck sector, as well as Zacks S&P 500 composite over the past year.
The industry has moved up 6.6% over this period compared with the S&P 500 and sector’s rise of 8.6% and 14%, 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 22.78X compared with the S&P 500’s 11.23X and the sector’s trailing-12-month EV/EBITDA of 10.74X.
Over the past five years, the industry has traded as high as 24.03X, as low as 15.21X and at a median of 20.30X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
Amid the coronavirus pandemic, near-term prospects for the auto retail and wholesale parts industry are expected to remain muted. While weak demand, lower footfall at stores and supply-side challenges are likely to weigh on earnings and revenues of the industry participants, e-commerce efforts will offer some respite. Although the strategic actions undertaken by the companies to cut costs may aid margins to some extent, these are not likely to be enough to offset revenue declines from tumbling demand, given how gravely the virus outbreak is weighing on the industry.
While the shift to EVs and autonomous cars may create new opportunities for the industry in the form of more supplicated products and services, there may be some temporary issues that need to be addressed to stay ahead of the game. The automotive retail and wholesale parts industry needs to develop a detailed roadmap to adapt to the changing market scenario.
None of the stocks in the industry has a Zacks Rank #1 (Strong Buy) or 2 (Buy). So we are presenting two stocks with a Zacks Rank #3 (Hold) that investors may choose to retain. You can see the complete list of today’s Zacks #1 Rank stocks here.
O’Reilly Automotive: This Springfield-based auto parts retailer has a long-term earnings growth rate of 13.3%. Over the trailing four quarters, the company beat earnings estimates twice and missed on the other two occasions, with the average positive surprise being 1.4%.
Price and Consensus: ORLY
AutoZone: This Tennessee-based company, which is one of the leading retailers of aftermarket automotive parts and accessories, has a long-term earnings growth rate of 9.4%. It beat earnings estimates in each of the trailing four quarters, with the average surprise being 4.6%.
Price and Consensus: AZO
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
Image: Shutterstock
Rough Ride Ahead for Auto Retail & Wholesale Parts Industry
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. Consumers have two options, either they can opt for repairing their 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).
Important companies belonging to this industry include Advance Auto Parts (AAP - Free Report) , CarMax (KMX - Free Report) , AutoZone (AZO - Free Report) and O’Reilly Automotive (ORLY - Free Report) .
Let’s take a look at the three major industry themes:
Zacks Industry Rank Depicts Grim Scenario
The Zacks Auto Retail & Wholesale Parts industry is a five-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #223, which places it in the bottom 7% of more than 245 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 position in the bottom 7% 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 gradually losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates have moved 23.3% south.
Before we present a few Auto Retail & Wholesale 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 Underperforms Sector and S&P 500
The Zacks Auto Retail and Wholesale Parts industry has underperformed the Auto, Tires and Truck sector, as well as Zacks S&P 500 composite over the past year.
The industry has moved up 6.6% over this period compared with the S&P 500 and sector’s rise of 8.6% and 14%, 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 22.78X compared with the S&P 500’s 11.23X and the sector’s trailing-12-month EV/EBITDA of 10.74X.
Over the past five years, the industry has traded as high as 24.03X, as low as 15.21X and at a median of 20.30X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
Amid the coronavirus pandemic, near-term prospects for the auto retail and wholesale parts industry are expected to remain muted. While weak demand, lower footfall at stores and supply-side challenges are likely to weigh on earnings and revenues of the industry participants, e-commerce efforts will offer some respite. Although the strategic actions undertaken by the companies to cut costs may aid margins to some extent, these are not likely to be enough to offset revenue declines from tumbling demand, given how gravely the virus outbreak is weighing on the industry.
While the shift to EVs and autonomous cars may create new opportunities for the industry in the form of more supplicated products and services, there may be some temporary issues that need to be addressed to stay ahead of the game. The automotive retail and wholesale parts industry needs to develop a detailed roadmap to adapt to the changing market scenario.
None of the stocks in the industry has a Zacks Rank #1 (Strong Buy) or 2 (Buy). So we are presenting two stocks with a Zacks Rank #3 (Hold) that investors may choose to retain. You can see the complete list of today’s Zacks #1 Rank stocks here.
O’Reilly Automotive: This Springfield-based auto parts retailer has a long-term earnings growth rate of 13.3%. Over the trailing four quarters, the company beat earnings estimates twice and missed on the other two occasions, with the average positive surprise being 1.4%.
Price and Consensus: ORLY
AutoZone: This Tennessee-based company, which is one of the leading retailers of aftermarket automotive parts and accessories, has a long-term earnings growth rate of 9.4%. It beat earnings estimates in each of the trailing four quarters, with the average surprise being 4.6%.
Price and Consensus: AZO
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>