Prospects of the Zacks Automotive - Retail & Wholesale - Parts industry look promising, thanks to the growing popularity of complex technology embedded vehicles, which call for professional assistance. While global chip shortage may pose near-term headwinds, the industry is set to benefit from rapid digitization, rising demand for electric vehicles and a deep focus on cost-containment efforts. In the light of the current scenario, auto retail parts companies like O'Reilly Automotive ORLY, AutoZone AZO, CarMax KMX and Advance Auto Parts AAP should be on your watchlist to reap rewards.
The Zacks Automotive - Retail and Wholesale - Parts industry players execute several functions. These include manufacturing, retailing, distribution, and installation of vehicle parts, equipment as well as accessories. Vehicle parts and accessories include seat covers, antifreeze, engine additives, wiper blades, batteries, brake system components, belts, chassis parts, driveline parts, engine parts as well as fuel pumps. Consumers have two options, either they can 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 a highly competitive one and undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
4 Key Investing Themes
Complex-Technology Embedded Cars on the Rise: The industry is undergoing a radical change with evolving customer expectations and technological innovation acting as game changers. A shift toward electric and driverless cars is spurring demand for technologically superior auto parts. The introduction of more complex and high-tech vehicles has led consumers to take more professional help, thereby opening up new opportunities for the industry participants.
Ramp-up of E-Commerce Initiatives: With the pandemic leading to wide adoption of online services, several dealers are ramping up investments in e-commerce tools, which are buoying their prospects. The launch of a simple, secure and user-friendly online platform is aiding in seamless end-to-end digitization of the companies’ sales processes. The race to invest vast sums in the e-commerce domain is gathering steam, propelling businesses to new heights.
Operational Efficiency is the Key: With the transition to greener vehicles, the companies are giving utmost importance to cost management for staying ahead in the game, as investments and R&D costs are on the rise owing to the development of superior technological platforms and sophisticated tools. The auto retail and wholesale parts industry is chalking out a detailed roadmap to make the most out of the opportunities amid the changing market scenario.
Supply Chain Snarls a Pain Point: The chip crunch — a byproduct of the COVID-19 pandemic that only got aggravated by the Russia-Ukraine war — is causing demand-supply imbalance, thereby leading to temporary hiccups for the industry. Many auto companies are forced to make production cuts, which in turn may result in lost revenues for auto retail parts companies. In addition to that, the industry has to deal with rising commodity costs, a tough labor market and logistical challenges, which may limit margins.
Zacks Industry Rank Indicates Favorable Prospects
The Zacks Auto Retail & Wholesale Parts industry is a four-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #50, which places it in the top 20% 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 strong 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. Over the past year, the industry’s earnings estimates for 2022 have increased 8.8%.
Considering the encouraging dynamics of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags Sector & S&P 500
The Zacks Auto Retail & 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 lost 46.6% over this period compared with the sector and S&P 500’s decline of 21.1% and 10.9%, 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.
On the basis of trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 27.46X compared with the S&P 500’s 12.35X and the sector’s 17.23X.
Over the past five years, the industry has traded as high as 29.93X and as low as 15.87X, with the median being at 22.78X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
4 Stocks to Keep a Tab on
AutoZone: AutoZone is one of the leading specialty retailers and distributors of automotive replacement parts as well as accessories in the United States. It has been generating record revenues for 23 consecutive 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, which currently carries a Zacks Rank #2 (Buy), has a long-term expected EPS growth rate of 11.5%. The Zacks Consensus Estimate for fiscal 2022 earnings and sales indicates a year-over-year uptick of 21% and 10%, respectively. AZO’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 19.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: AZO
O’Reilly: O'Reilly 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 since 29 consecutive years on the back of growth in the auto parts market. ORLY is poised to benefit from store openings and distribution centers in profitable regions. Strong cash flow generation is supporting the firm’s robust buyback program, thereby boosting investors’ confidence.
O’Reilly, which currently carries a Zacks Rank #3 (Hold), has a long-term expected EPS growth rate of 12.6%. The Zacks Consensus Estimate for its 2022 earnings and sales indicates a year-over-year uptick of 5% and 7.3%, respectively. ORLY has managed to pull off earnings beat thrice out of the last four quarters and missed once, the average surprise being 13.4%.
Price & Consensus: ORLY
CarMax: Headquartered in Richmond, VA, CarMax operates as a specialty retailer of used vehicles. The acquisition of Edmunds has solidified CarMax’s position in the used auto ecosystem. It has enhanced CarMax’s digital capabilities and bolstered long-term prospects. Store-expansion initiatives, fast delivery and high-quality products are improving CarMax’s market share.
CarMax, which currently carries a Zacks Rank #3, has a long-term expected EPS growth rate of 15.5%. The Zacks Consensus Estimate for fiscal 2023 and 2024 sales indicate a year-over-year uptick of 6% and 3.4%, respectively. The consensus mark for fiscal 2022 earnings has moved north by 7% over the past 30 days. The same for fiscal 2023 earnings have been revised upward by 7 cents over the past seven days.
Price & Consensus: KMX
Advance Auto: Advance Auto operates in the U.S. automotive aftermarket industry and is engaged in selling replacement parts (excluding tires), accessories, batteries as well as maintenance items for vehicles. Expansion and optimization of its footprint by opening new stores, widening online presence and strategic collaborations bode well for Advance Auto Parts' growth prospects. Balance sheet strength and commitment to return shareholder capital are other tailwinds in AAP’s story.
Advance Auto Parts, which currently carries a Zacks Rank #3, has a long-term expected EPS growth rate of 12.6%. The Zacks Consensus Estimate for 2022 earnings and sales indicate a year-over-year uptick of 13.9% and 3.4%, respectively. Over the trailing four quarters, AAP surpassed earnings estimates on all occasions, the average surprise being 9.2%.
Price & Consensus: AAP
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O'Reilly Automotive, Inc. (ORLY) : Free Stock Analysis Report
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