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The Zacks Automotive - Original Equipment industry is battling commodity cost inflation, supply chain disruptions and a potential slowdown in the vehicle growth rate. Costs of borrowing remain high, and there is a lot of uncertainty regarding the timing of Fed rate cuts. Rising operational costs and shifting industry dynamics are the other hurdles.
Balancing revenue generation amid these challenges might prove difficult for industry participants. Success will hinge on effective cost-management efforts. Oshkosh Corp. and Allison Transmission are better positioned to navigate the challenging landscape of the industry.
Industry Overview
The Zacks Automotive - Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering, and suspension, as well as brakes.
Demand for original equipment depends directly on the sale of vehicles, which, in turn, is heavily reliant on economic growth and consumer confidence. Importantly, the rapidly globalizing world is opening up newer avenues for auto-equipment manufacturers who need to adapt to the changing dynamics through systematic research and development. From a future competitive standpoint, the industry players need to focus on technologies that offer the best value in a short span of time to the market.
Factors at Play
Anticipated Deceleration in Auto Sales Growth: After a strong sales rebound in 2023, the auto industry anticipates moderate growth in 2024. The U.S. Federal Reserve's decision to refrain from early interest rate reductions, coupled with a robust job market and high inflation, reduces the possibility of a summer rate cut. Vehicle financing costs remain relatively high. Furthermore, with pent-up demand largely met in 2023, analysts predict a slowdown in sales growth this year. This deceleration in demand growth poses challenges for industry participants whose fortunes are closely linked to auto sales.
Cost Challenges and Supply Chain Risks: Elevated raw material and labor costs continue to trouble the sector. Despite some relief in raw material costs, they remain higher than pre-pandemic levels. Inflationary pressure persists, squeezing profit margins. Supply chain vulnerabilities, exacerbated by shipping disruptions such as the Red Sea crisis and the recent Baltimore bridge collapse, pose further challenges. Additionally, the industry's global footprint exposes it to risks related to foreign exchange fluctuations, affecting earnings and margins.
Adapting to Technological Advances: Rapid technological progress and digitalization are driving transformation in the automotive equipment sector. Original equipment manufacturers (OEMs) are focusing on advanced components for electric and autonomous vehicles (EVs and AVs). Tight emission regulations are creating demand for high-quality, cost-effective auto parts, benefiting equipment providers.
However, this shift poses challenges for OEMs, requiring significant investment in research and development. Cost management is crucial for maintaining profitability. Success for equipment providers depends on their ability to manage expenses, embrace new technologies and seize revenue opportunities.
Zacks Industry Rank Is Not So Promising
The Zacks Automotive – Original Equipment industry is placed within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #156, which places it in the bottom 38% of around 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates glum near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence about this group's earnings growth potential. Year to date, the industry's earnings estimates for 2024 have declined 6.3%.
Before we present a few stocks that you may still 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 & S&P 500
Over the past year, the Zacks Original Equipment industry has underperformed the broader Auto sector and the Zacks S&P 500 composite. The industry has lost 11.9% against the sector and S&P 500's growth of 4.5% and 27.2%, respectively.
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.
On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 13.68X compared with the S&P 500's 15.04X and the sector's 14.4X.
Over the past five years, the industry has traded as high as 19.84X, as low as 3.92X and at a median of 10.16X.
2 Stocks to Buy Now
Allison is a manufacturer of fully automatic transmissions for medium and heavy-duty commercial and heavy-tactical U.S. defense vehicles. The strategic buyouts of Walker Die, C&R Tool & Engineering, Vantage Power, the Off-Highway transmission portfolio of AVTEC and AxleTech's electric vehicle (EV) system division are set to boost Allison's long-term prospects. Regular product launches, including FracTran, TerraTran and the 3414 Regional Haul Series fully automatic transmission, bode well. The company's electric solutions promise growth opportunities.
The firm's investor-friendly moves also instill confidence. In 2023, Allison bought back $260 million in stock, representing 6% of shares outstanding. The company has increased its annual dividend each year since 2020. It hiked its payout by 8.7% to 25 cents a share for the first quarter of 2024, marking the fifth straight year of dividend increase.
Allison currently carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of B. The Zacks Consensus Estimate for 2024 top and bottom lines implies year-over-year growth of 2.1% and 3.2%, respectively, year over year. The consensus mark for 2024 and 2025 EPS has moved up 67 cents and 71 cents, respectively, over the past 30 days.
Oshkosh is a producer and seller of a varied range of vehicle bodies and specialty vehicles. Frequent business wins, and a comprehensive offering of innovative new products are set to drive Oshkosh's prospects. Its record consolidated backlog of $16.8 billion (approximately $4.52 billion in Access Equipment, $6.76 billion in Defense and $5.45 billion in Vocational) provides enough visibility for the coming years. The acquisitions of Pratt Miller, CartSeeker Technology, JBT's AeroTech business and Hinowa have bolstered Oshkosh's portfolio.
The firm's balance sheet strength and investor-friendly moves instill optimism. The total debt-to-capital ratio stands at 0.14, lower both in absolute and relative terms. In 2023, it hiked its dividend by 12.2%, which marked the tenth consecutive year of double-digit percentage increase.
Oshkosh currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The Zacks Consensus Estimate for 2024 top and bottom lines implies year-over-year growth of 6.8% and 3%, respectively, year over year. The consensus mark for 2024 and 2025 EPS has moved up 1 cent each over the past seven days.
Why Haven't You Looked at Zacks' Top Stocks?
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Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Oshkosh and Allison Transmission
For Immediate Release
Chicago, IL – April 10, 2024 – Today, Zacks Equity Research discusses Oshkosh Corp. (OSK - Free Report) and Allison Transmission (ALSN - Free Report) .
Industry: Auto Equipment
Link: https://www.zacks.com/commentary/2252366/2-auto-equipment-providers-worth-buying-despite-industry-concerns
The Zacks Automotive - Original Equipment industry is battling commodity cost inflation, supply chain disruptions and a potential slowdown in the vehicle growth rate. Costs of borrowing remain high, and there is a lot of uncertainty regarding the timing of Fed rate cuts. Rising operational costs and shifting industry dynamics are the other hurdles.
Balancing revenue generation amid these challenges might prove difficult for industry participants. Success will hinge on effective cost-management efforts. Oshkosh Corp. and Allison Transmission are better positioned to navigate the challenging landscape of the industry.
Industry Overview
The Zacks Automotive - Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering, and suspension, as well as brakes.
Demand for original equipment depends directly on the sale of vehicles, which, in turn, is heavily reliant on economic growth and consumer confidence. Importantly, the rapidly globalizing world is opening up newer avenues for auto-equipment manufacturers who need to adapt to the changing dynamics through systematic research and development. From a future competitive standpoint, the industry players need to focus on technologies that offer the best value in a short span of time to the market.
Factors at Play
Anticipated Deceleration in Auto Sales Growth: After a strong sales rebound in 2023, the auto industry anticipates moderate growth in 2024. The U.S. Federal Reserve's decision to refrain from early interest rate reductions, coupled with a robust job market and high inflation, reduces the possibility of a summer rate cut. Vehicle financing costs remain relatively high. Furthermore, with pent-up demand largely met in 2023, analysts predict a slowdown in sales growth this year. This deceleration in demand growth poses challenges for industry participants whose fortunes are closely linked to auto sales.
Cost Challenges and Supply Chain Risks: Elevated raw material and labor costs continue to trouble the sector. Despite some relief in raw material costs, they remain higher than pre-pandemic levels. Inflationary pressure persists, squeezing profit margins. Supply chain vulnerabilities, exacerbated by shipping disruptions such as the Red Sea crisis and the recent Baltimore bridge collapse, pose further challenges. Additionally, the industry's global footprint exposes it to risks related to foreign exchange fluctuations, affecting earnings and margins.
Adapting to Technological Advances: Rapid technological progress and digitalization are driving transformation in the automotive equipment sector. Original equipment manufacturers (OEMs) are focusing on advanced components for electric and autonomous vehicles (EVs and AVs). Tight emission regulations are creating demand for high-quality, cost-effective auto parts, benefiting equipment providers.
However, this shift poses challenges for OEMs, requiring significant investment in research and development. Cost management is crucial for maintaining profitability. Success for equipment providers depends on their ability to manage expenses, embrace new technologies and seize revenue opportunities.
Zacks Industry Rank Is Not So Promising
The Zacks Automotive – Original Equipment industry is placed within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #156, which places it in the bottom 38% of around 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates glum near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence about this group's earnings growth potential. Year to date, the industry's earnings estimates for 2024 have declined 6.3%.
Before we present a few stocks that you may still 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 & S&P 500
Over the past year, the Zacks Original Equipment industry has underperformed the broader Auto sector and the Zacks S&P 500 composite. The industry has lost 11.9% against the sector and S&P 500's growth of 4.5% and 27.2%, respectively.
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.
On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 13.68X compared with the S&P 500's 15.04X and the sector's 14.4X.
Over the past five years, the industry has traded as high as 19.84X, as low as 3.92X and at a median of 10.16X.
2 Stocks to Buy Now
Allison is a manufacturer of fully automatic transmissions for medium and heavy-duty commercial and heavy-tactical U.S. defense vehicles. The strategic buyouts of Walker Die, C&R Tool & Engineering, Vantage Power, the Off-Highway transmission portfolio of AVTEC and AxleTech's electric vehicle (EV) system division are set to boost Allison's long-term prospects. Regular product launches, including FracTran, TerraTran and the 3414 Regional Haul Series fully automatic transmission, bode well. The company's electric solutions promise growth opportunities.
The firm's investor-friendly moves also instill confidence. In 2023, Allison bought back $260 million in stock, representing 6% of shares outstanding. The company has increased its annual dividend each year since 2020. It hiked its payout by 8.7% to 25 cents a share for the first quarter of 2024, marking the fifth straight year of dividend increase.
Allison currently carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of B. The Zacks Consensus Estimate for 2024 top and bottom lines implies year-over-year growth of 2.1% and 3.2%, respectively, year over year. The consensus mark for 2024 and 2025 EPS has moved up 67 cents and 71 cents, respectively, over the past 30 days.
You can see the complete list of today's Zacks #1 Rank stocks here.
Oshkosh is a producer and seller of a varied range of vehicle bodies and specialty vehicles. Frequent business wins, and a comprehensive offering of innovative new products are set to drive Oshkosh's prospects. Its record consolidated backlog of $16.8 billion (approximately $4.52 billion in Access Equipment, $6.76 billion in Defense and $5.45 billion in Vocational) provides enough visibility for the coming years. The acquisitions of Pratt Miller, CartSeeker Technology, JBT's AeroTech business and Hinowa have bolstered Oshkosh's portfolio.
The firm's balance sheet strength and investor-friendly moves instill optimism. The total debt-to-capital ratio stands at 0.14, lower both in absolute and relative terms. In 2023, it hiked its dividend by 12.2%, which marked the tenth consecutive year of double-digit percentage increase.
Oshkosh currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The Zacks Consensus Estimate for 2024 top and bottom lines implies year-over-year growth of 6.8% and 3%, respectively, year over year. The consensus mark for 2024 and 2025 EPS has moved up 1 cent each over the past seven days.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.