2 Auto Replacement Parts Stocks Riding the Industry's Optimism
Aging vehicles are a key catalyst for the bright prospects of the Zacks Automotive Replacement Parts industry. In a bid to ensure the sustained operability of their older vehicles, consumers are opting to invest in the substitution of defective parts and constituents. Additionally, integration of e-commerce and soaring popularity of technologically advanced vehicles are revolutionizing the industry. However, commodity cost inflation, forex woes and logistical challenges may pose concerns. Industry participants like Genuine Parts Company GPC and LKQ Corporation LKQ stand out favorably due to their strategic acquisitions and investor-friendly initiatives.
Industry Overview
The Zacks Automotive - Replacement 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 as well as accessorize vehicles. Some important auto replacement components are engine, steering, drive axle, suspension, brakes and gearbox parts. The auto replacement market is somewhat less exposed to business downturns as consumers are more inclined to spend on replacement parts to maintain their vehicles rather than splurge on new ones. Consumers can either opt for repairing vehicles on their own or can avail professional services for the same. The industry is undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
Factors at Play
Vehicle Longevity is a Key Driver: According to the S&P Global Mobility report released in May, the mean age of automobiles in the United States reached 12.5 years in 2023. This marks the sixth consecutive year of rise in the average age of vehicles and the most substantial annual upturn since the recession of 2008-2009. The escalated pace of the average light vehicle age's growth brings advantages to the automotive replacement sector. A more aged collection of vehicles implies an ongoing requirement for repair and maintenance to uphold proper functionality. Typically aligned with the advancement in the mean vehicle age, the industry's course is experiencing growth, as consumers allocate more resources to sustain the operation of their maturing automobiles. Consequently, there has been a noticeable upsurge in the demand for automotive replacement parts.
New Opportunities Arising from Technology: The automotive sector is experiencing a transformative shift, driven by the widespread integration of cutting-edge technology and swift digitization, resulting in a complete overhaul of the market landscape. This transformation has opened up new growth avenues for the auto replacement parts industry. As the electrification and autonomous driving trends gain momentum, industry participants are redoubling their efforts to engineer technologically sophisticated components. Modern vehicles are equipped with advanced technologies and components that may require replacement over time. This includes electronic systems, sensors and other specialized parts that contribute to the growth of replacement part demand.
Digitization Ramp up: The surge of e-commerce and online retail has reshaped the auto replacement parts industry by providing unprecedented accessibility, diversity of options and convenience for consumers.Through online platforms, customers can easily compare a wide array of replacement parts, read reviews, and access comprehensive product information, enabling informed purchasing decisions. The global reach of e-commerce allows customers to source specialized parts from various regions. This digital transformation benefits both “Do-It-Yourself” enthusiasts and professional mechanics, streamlining the process of finding and acquiring the necessary components. Overall, e-commerce has empowered consumers, expanded market access, and revolutionized the industry's growth trajectory by enhancing customer engagement and choice.
Cost-Related Challenges are Concerning: The emergence of highly advanced automotive components is exerting notable pressure on the profit margins of auto replacement parts. Escalating commodity costs compound these issues and could potentially undermine profitability. Additionally, the widespread international footprint of many industry participants renders them vulnerable to foreign exchange complexities. Adverse currency conversions might affect earnings and margins. Moreover, the industry is contending with logistical hurdles and supply chain disruptions, which serve to further curtail potential growth prospects.
Zacks Industry Rank Signals Encouraging Picture
The Zacks Automotive – Replacements Parts industry is a four-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #79, which places it in the top 31% 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 solid 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 in this group’s earnings growth potential. Since the beginning of the year, the industry’s earnings estimates for 2023 have moved 2.3% north.
Before we present two stocks from the industry worth considering for your portfolio, let's take a look at the industry’s stock market performance and current valuation.
Industry Outperforms Sector but Lags S&P 500
The Zacks Automotive – Replacement Parts industry has outpaced the Auto, Tires and Truck sector but underperformed the Zacks S&P 500 composite over the past year. The industry has declined 9%, narrower than the sector’s decline of 18.8%. Meanwhile, the S&P 500 has risen 5.4% over the same timeframe.
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. On the basis of trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 8.7X compared with the S&P 500’s 13.45X and the sector’s trailing-12-month EV/EBITDA of 12.07X. Over the past five years, the industry has traded as high as 15.08X, as low as 6.76X and at a median of 9.33X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Keep a Tab On
Genuine Parts: Atlanta-based Genuine Parts distributes auto and industrial replacement parts across the United States, Canada, Mexico, Australia, New Zealand, Singapore, Indonesia, France, the United Kingdom, Germany and Poland.Genuine Parts’ strategic buyouts to improve product offerings and expand its geographical footprint are boosting its prospects. The KDG acquisition has strengthened Genuine Parts’ market-leading position of North American industrial platform.
Other strategic bolt-on acquisitions, including Winparts, Rare Spares, PartsPoint and Alliance Automotive Group are adding to the top-line growth of the Automotive segment. The recent acquisition of Gaudi has expanded GPC’s European automotive footprint. The company's dividend aristocrat status is commendable. The upbeat 2023 sales and earnings view further sparks optimism. Genuine Parts projects 2023 revenues from both the Automotive and Industrial segments to increase by 4-6%.
The Zacks Consensus Estimate for GPC’s 2023 and 2024 sales implies year-over-year growth of 5.6% and 4.3%, respectively. The consensus mark for 2023 and 2024 earnings suggests a year-over-year improvement of 10.8% and 8.2%, respectively. Genuine Parts — currently carrying a Zacks Rank #2 (Buy) and a Value Score of B — topped earnings estimates in the trailing four quarters, with the average surprise being 7.10%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: GPC
LKQ: Headquartered in Illinois, LKQ is one of the leading providers of replacement parts, components and systems. LKQ’s strategic acquisitions are boosting its prospects. The acquisition of Uni-Select Inc. for $2.1 billion, completed on Aug 1, 2023, is set to bolster its global automotive vehicle parts distribution business.
Synergistic acquisitions in July, including that of a U.S. remanufacturer and distributor of engines, a leading UK truck parts distributor, a Holland-based automotive parts distributor, a Belgium-based automotive parts and accessories business, and an aftermarket accessories distributor in Texas and Oklahoma bode well. Its strategic partnership with Mobivia is expected to boost LKQ’s Europe unit prospects. Strong cash flow and investor-friendly moves are boosting shareholders’ confidence. The company’s North American and European segments have been performing well.
The Zacks Consensus Estimate for LKQ’s 2023 and 2024 sales implies year-over-year growth of 6.3% and 7.5%, respectively. The consensus mark for 2023 and 2024 earnings suggests a year-over-year improvement of 4% and 10%, respectively. LKQ— currently carrying a Zacks Rank #3 (Hold) and having a Value Score of A — topped earnings estimates in three of the trailing four quarters and missed in the other, with the average surprise being 1.5%.
Price & Consensus: LKQ
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Genuine Parts Company (GPC) : Free Stock Analysis Report
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