The Zacks Automotive-Retail and Wholesale-Parts industry is benefiting from robust pent-up vehicle demand and improved inventory levels, which is bolstering its prospects. The emergence of sophisticated and advanced vehicles has prompted consumers to seek professional assistance, creating fresh avenues for industry participants. The auto parts retailers should devise a comprehensive strategy to capitalize on these opportunities. In light of the evolving market landscape, effective cost management is paramount. O’Reilly Automotive ORLY and AutoZone AZO are two noteworthy industry players to keep an eye on.
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. Vehicle parts and accessories include seat covers, antifreeze, engine additives, wiper blades, batteries, brake system components, belts, chassis parts, driveline parts, engine parts and fuel pumps. Consumers have two options. They can either opt for repairing 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). The industry is highly competitive and undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
Factors Shaping the Industry
Growing Vehicle Sales Driving Parts Market: Auto parts retailers are set to reap the rewards of an upswing in demand for new vehicles, fueled by the growing need for personal mobility and the introduction of enticing models. Total new-vehicle sales in the United States are expected to rise 22.6% year over year to 1,381,200 units in June 2023. Factors such as pent-up demand and improved inventory levels will contribute to this boost in sales. Amid rising vehicle sales, demand for auto retail and wholesale parts has also been on the rise, aiding industry participants.
Technology Progress Opening up New Opportunities: The industry is experiencing a transformation due to shifting customer demands and revolutionary technological advancements. The rise of sophisticated and advanced vehicles has led consumers to seek professional assistance instead of relying on do-it-yourself methods. The extensive adoption of technology and swift digitization is causing a fundamental reorganization of the automotive market. The implementation of omnichannel marketing and accelerated digitization are driving sales growth.
Escalating Expenses a Headwind: Despite a post-pandemic economic rebound, companies are grappling with mounting logistic costs. The labor market is facing difficulties due to a scarcity of available workers, leading to increased expenses. The elevated costs of raw materials have amplified overall manufacturing expenses for companies and are negatively impacting gross margins. Also, the shift toward complex vehicles is resulting in higher capex and R&D costs. The industry must strategically outline a comprehensive plan to capitalize on these opportunities amid a shifting market landscape.
Zacks Industry Rank Depicts Promising Outlook
The Zacks Auto Retail & Wholesale Parts industry is within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #112, which places it in the top 45% 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 encouraging 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential.
Before we present a few stocks that should be on your watchlist, let’s take a look at the industry’s shareholder returns and current valuation first.
Industry Tops Sector, Underperforms S&P 500
The Zacks Auto Retail and Wholesale Parts industry has outperformed the Auto, Tires and Truck sector but underperformed the Zacks S&P 500 composite over the past year. The industry has gained 9.5% over this period compared with the S&P 500 and sector’s growth of 14.6% and 3%, respectively.
One-Year Price Performance
Industry’s Current Valuation
Since automotive companies are debt-laden, it makes sense to value them based on the Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) ratio.
Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 63.03X compared with the S&P 500’s 13.31X and the sector’s 13.51X.
Over the past five years, the industry has traded as high as 66.88X and as low as 15.87X, with the median being 23.73X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
2 Stocks That Should Be on Your Radar
O’Reilly: It is one of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The company has been generating record revenues for 30 consecutive years due to growth in the auto parts market. ORLY is poised to benefit from store openings and distribution centers in profitable regions. It targets to open 180-190 new stores in 2023. Strong cash flow generation supports the firm’s robust buyback program, thereby boosting investors’ confidence. In 2022, the firm repurchased 5 million shares for $3.28 billion. As of Apr 26, the company had nearly $475 million remaining under the current share repurchase authorization.
O’Reilly, which currently carries a Zacks Rank #2 (Buy), has a long-term expected EPS growth rate of around 13.20%. The Zacks Consensus Estimate for its 2023 earnings and sales indicates a year-over-year uptick of 11.2% and 7.6%, respectively. The consensus mark for 2024 sales and earnings per share implies year-over-year growth of 5.3% and 11%, respectively. ORLY pulled off earnings beat thrice in the last four quarters for as many misses, the average surprise being 4.6%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: ORLY
AutoZone: It is one of the leading specialty retailers and distributors of automotive replacement parts and accessories in the United States. It has been generating record revenues for 24 straight years and the trend is expected to continue. The company’s high-quality products, store-expansion initiatives and omni-channel efforts to improve customer shopping experience are boosting its market share. AutoZone’s robust buyback program also sparks confidence. In fiscal 2022, the firm repurchased $4.4 billion of stock. This month, the company boosted its buyback authorization by $2 billion.
AutoZone, which currently carries a Zacks Rank #3 (Hold), has a long-term expected EPS growth rate of 12.5%. The Zacks Consensus Estimate for fiscal 2023 earnings and sales indicates a year-over-year uptick of 6.7% and 11.4%, respectively. The consensus mark for fiscal 2024 sales and earnings per share implies year-over-year growth of 4.7% and 10%, respectively. AZO’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 10.2%.
Price & Consensus: AZO
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report