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Why Its Worth Taking a Closer Look at the Automotive Aftermarket
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The US aftermarket for automotive parts and components is neither too consolidated nor too fragmented, since it includes both tier-1 and tier-2 component manufacturers as well as a large number of smaller, often less organized, players. In addition to expanding their product portfolios and increasing their production capacity, players often partner with large local dealers and engage in strategic M&A to increase their geographical reach/distribution networks, capture additional market share and gain a competitive edge. Because of the large number of players, the competitive landscape is determined by product range, quality and pricing. Digital commerce is increasingly becoming an important factor determining sales.
Growth Prospects
According to a report by Persistence Market Research, the global market for automotive aftermarket parts is expected to reach $ 984.12 billion by 2033, growing at a CAGR of 5.5% from 2023 to 2033.
The Asia Pacific region is expected to be the fastest-growing market, followed by North America and Europe. Because of increased urbanization and improvement in the standard of living in the region, consumption of passenger cars and commercial vehicles is on the rise. This creates increased scope for parts manufacturers. The growing preference for after-market parts from third parties over parts from the manufacturer (OEM) is also an important driver for this industry. (Persistence Market Research)
Performance parts, i.e. those high-performance parts that are not manufactured by OEMs but are often priced at a premium because of their quality and uses, are estimated to grow at a CAGR of 4.6% between 2022 and 2032 by Future Market Insights.
Strength in the parts market is also determined by the age of existing cars. The pandemic led consumers to keep their cars longer, since they were not using them as much anyway. But post-pandemic, there was a surge in demand for cars both old and new, which was also positive for parts sales.
However, market research from IHS Markit indicates that this trend will continue over the next few years at least. The research firm estimates (as quoted by supplychainbrain) that the average vehicle age was 11.9 years in 2020, 12.1 years in 2021 and en route to reach 12.6 years by 2025. Stronger and better-made cars, the remote working trend and online shopping are expected to be the main reasons for this.
Supply chain imbalances ensued after the great reopening, spurred by chip shortages, labor shortages and transport bottlenecks. All of these factors limited availability and drove up freight costs. As a result, fewer new cars were built (with longer term negative impact on parts makers) and demand for used cars skyrocketed (with positive implications for parts makers). However, since these conditions also impacted raw material availability for parts makers, they couldn’t make the most of the opportunity.
A prospective growth driver for parts makers is the electric vehicle EV market, where government mandate, individual concern and corporate competition is combining to generate significant investment and sales. Parts makers face a challenge with respect to this market, since EVs have fewer spare parts that can be replaced.
This doesn’t mean that there will be fewer opportunities but just that the opportunity will be of new variety. McKinsey’s Automotive Software and Electronics 2030 report says that trends in the autonomous driving connected vehicles, electrification of the powertrain and shared mobility (ACES) market during the forecast period will contribute to a 7% CAGR in automotive software, as well as electrical and electronic components, outpacing the overall growth in the automotive market.
Packaging of EV components potentially expands the TAM for players. According to “supplychainbrain”: “On the surface, it may seem problematic for the aftermarket industry that electric vehicles (EV) and smart cars have significantly fewer parts than internal combustion engine vehicles. However, while they are fewer, they may be lighter, more fragile and more expensive, so it’s critically important to provide consistent, precise protection for these parts, like the protection you’d find from a custom-engineered packaging solution.
"It’s also important to note that the packaging you use for mechanical parts is not the same packaging you’ll need for high-value electronics parts, which require specially designed packaging to protect against shock, vibration, and electrostatic discharges. In addition, as OEMs compete for EV battery charge range, lightweighting of assembly parts is a common strategy to reduce overall car weight. These lighter body panels, windshields, and even tires are more delicate and thus require more specialized protection in transit.”
Finally, while all the above factors are important and will drive sales, it’s important to remember that the customer base, including habits and preferences are changing. Therefore, companies without online presence (whether using a broader platform like Amazon or an in-house platform, or something in between, like a dealer’s website) will lose out.
The DIY auto maintenance and repair trend adds another layer of complexity. Companies that offer the greatest choice to customers, including the ability to have their products shipped to their repair center of choice, to pick them up in-store, to request home delivery, or to schedule a mobile installation will obviously do better than those that don’t offer these choices.
2 Picks
Given the strong growth prospects, I’ve picked three stocks that you may want to consider to gain exposure to this segment:
Cambridge, MA-based CarGurus is an online automotive marketplace that facilitates the connection between buyers and sellers of new and used cars globally. The company operates through two segments: U.S. Marketplace and Digital Wholesale. CarGurus operates under various brands, including CarGurus, Autolist, CarOffer and PistonHeads.
The Zacks Rank #2 (Buy) stock beat estimates by 62.5% in the last quarter. Analyst estimates for 2023 and 2024 have increased a respective 27.3% and 9.0% in the last 60 days. Current estimates represent an earnings decline of 3.9% in 2023 followed by an increase of 11.0% the following year.
Atlanta-based Genuine Parts Company is a distributor of automotive replacement parts and industrial parts and materials, including related services. The company operates through two segments: Automotive Parts Group and Industrial Parts Group. It distributes a wide range of automotive replacement parts for various vehicles, including hybrid and electric vehicles, trucks, motorcycles and farm equipment.
The company also distributes industrial replacement parts and supplies to customers in different industries, such as manufacturing, mining and power generation. It has operations across the U.S., Canada, France, the United Kingdom, Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia, New Zealand, Mexico, Indonesia and Singapore, Genuine Parts Company.
GPC shares carry a Zacks Rank #2. The company reported an earnings surprise of 5.9% in the last-reported quarter. The Zacks Consensus Estimate for 2023 has climbed 5 cents in the last 60 days to $9.07 while the 2024 estimate increased 6 cents to $9.78 in the same time period. Analysts are looking for earnings growth of 8.8% in 2023 and 7.8% in 2024.
Year-to-Date Price Performance
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Why Its Worth Taking a Closer Look at the Automotive Aftermarket
The US aftermarket for automotive parts and components is neither too consolidated nor too fragmented, since it includes both tier-1 and tier-2 component manufacturers as well as a large number of smaller, often less organized, players. In addition to expanding their product portfolios and increasing their production capacity, players often partner with large local dealers and engage in strategic M&A to increase their geographical reach/distribution networks, capture additional market share and gain a competitive edge. Because of the large number of players, the competitive landscape is determined by product range, quality and pricing. Digital commerce is increasingly becoming an important factor determining sales.
Growth Prospects
According to a report by Persistence Market Research, the global market for automotive aftermarket parts is expected to reach $ 984.12 billion by 2033, growing at a CAGR of 5.5% from 2023 to 2033.
The Asia Pacific region is expected to be the fastest-growing market, followed by North America and Europe. Because of increased urbanization and improvement in the standard of living in the region, consumption of passenger cars and commercial vehicles is on the rise. This creates increased scope for parts manufacturers. The growing preference for after-market parts from third parties over parts from the manufacturer (OEM) is also an important driver for this industry. (Persistence Market Research)
Performance parts, i.e. those high-performance parts that are not manufactured by OEMs but are often priced at a premium because of their quality and uses, are estimated to grow at a CAGR of 4.6% between 2022 and 2032 by Future Market Insights.
Strength in the parts market is also determined by the age of existing cars. The pandemic led consumers to keep their cars longer, since they were not using them as much anyway. But post-pandemic, there was a surge in demand for cars both old and new, which was also positive for parts sales.
However, market research from IHS Markit indicates that this trend will continue over the next few years at least. The research firm estimates (as quoted by supplychainbrain) that the average vehicle age was 11.9 years in 2020, 12.1 years in 2021 and en route to reach 12.6 years by 2025. Stronger and better-made cars, the remote working trend and online shopping are expected to be the main reasons for this.
Supply chain imbalances ensued after the great reopening, spurred by chip shortages, labor shortages and transport bottlenecks. All of these factors limited availability and drove up freight costs. As a result, fewer new cars were built (with longer term negative impact on parts makers) and demand for used cars skyrocketed (with positive implications for parts makers). However, since these conditions also impacted raw material availability for parts makers, they couldn’t make the most of the opportunity.
A prospective growth driver for parts makers is the electric vehicle EV market, where government mandate, individual concern and corporate competition is combining to generate significant investment and sales. Parts makers face a challenge with respect to this market, since EVs have fewer spare parts that can be replaced.
This doesn’t mean that there will be fewer opportunities but just that the opportunity will be of new variety. McKinsey’s Automotive Software and Electronics 2030 report says that trends in the autonomous driving connected vehicles, electrification of the powertrain and shared mobility (ACES) market during the forecast period will contribute to a 7% CAGR in automotive software, as well as electrical and electronic components, outpacing the overall growth in the automotive market.
Packaging of EV components potentially expands the TAM for players. According to “supplychainbrain”: “On the surface, it may seem problematic for the aftermarket industry that electric vehicles (EV) and smart cars have significantly fewer parts than internal combustion engine vehicles. However, while they are fewer, they may be lighter, more fragile and more expensive, so it’s critically important to provide consistent, precise protection for these parts, like the protection you’d find from a custom-engineered packaging solution.
"It’s also important to note that the packaging you use for mechanical parts is not the same packaging you’ll need for high-value electronics parts, which require specially designed packaging to protect against shock, vibration, and electrostatic discharges. In addition, as OEMs compete for EV battery charge range, lightweighting of assembly parts is a common strategy to reduce overall car weight. These lighter body panels, windshields, and even tires are more delicate and thus require more specialized protection in transit.”
Finally, while all the above factors are important and will drive sales, it’s important to remember that the customer base, including habits and preferences are changing. Therefore, companies without online presence (whether using a broader platform like Amazon or an in-house platform, or something in between, like a dealer’s website) will lose out.
The DIY auto maintenance and repair trend adds another layer of complexity. Companies that offer the greatest choice to customers, including the ability to have their products shipped to their repair center of choice, to pick them up in-store, to request home delivery, or to schedule a mobile installation will obviously do better than those that don’t offer these choices.
2 Picks
Given the strong growth prospects, I’ve picked three stocks that you may want to consider to gain exposure to this segment:
CarGurus, Inc. (CARG - Free Report)
Cambridge, MA-based CarGurus is an online automotive marketplace that facilitates the connection between buyers and sellers of new and used cars globally. The company operates through two segments: U.S. Marketplace and Digital Wholesale. CarGurus operates under various brands, including CarGurus, Autolist, CarOffer and PistonHeads.
The Zacks Rank #2 (Buy) stock beat estimates by 62.5% in the last quarter. Analyst estimates for 2023 and 2024 have increased a respective 27.3% and 9.0% in the last 60 days. Current estimates represent an earnings decline of 3.9% in 2023 followed by an increase of 11.0% the following year.
Genuine Parts Company (GPC - Free Report)
Atlanta-based Genuine Parts Company is a distributor of automotive replacement parts and industrial parts and materials, including related services. The company operates through two segments: Automotive Parts Group and Industrial Parts Group. It distributes a wide range of automotive replacement parts for various vehicles, including hybrid and electric vehicles, trucks, motorcycles and farm equipment.
The company also distributes industrial replacement parts and supplies to customers in different industries, such as manufacturing, mining and power generation. It has operations across the U.S., Canada, France, the United Kingdom, Ireland, Germany, Poland, the Netherlands, Belgium, Spain, Portugal, Australia, New Zealand, Mexico, Indonesia and Singapore, Genuine Parts Company.
GPC shares carry a Zacks Rank #2. The company reported an earnings surprise of 5.9% in the last-reported quarter. The Zacks Consensus Estimate for 2023 has climbed 5 cents in the last 60 days to $9.07 while the 2024 estimate increased 6 cents to $9.78 in the same time period. Analysts are looking for earnings growth of 8.8% in 2023 and 7.8% in 2024.
Year-to-Date Price Performance
Image Source: Zacks Investment Research