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Auto Replacement Parts Industry Shines Bright: 4 Winners
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The Zacks Automotive- Replacements Parts industry is thriving on the back of increasing average age of vehicles, which is boosting the demand of auto repair, maintenance and replacement parts. Also, amid growing concerns of economic slowdown, customers are expected to opt for repairing old vehicles rather than splurging on new vehicles that are highly priced.
Widespread usage of technology is resulting in fundamental restructuring of the auto market. The automotive replacement parts industry needs to develop a detailed roadmap to make the most out of the opportunities in a changing market scenario. Industry players including Genuine Parts Company (GPC - Free Report) , LKQ Corporation (LKQ - Free Report) , Dorman Products, Inc. (DORM - Free Report) and Standard Motor Products, Inc. (SMP - Free Report) are poised to gain.
Industry Info
The Zacks Automotive- Replacements 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. A few of the important auto replacement components include engine, steering, drive axle, suspension, brakes and gearbox parts.
3 Trends Influencing the Auto Replacements Parts Industry
Aging Vehicles a Boon: Increasing average age of cars is fueling demand for auto replacement parts. Per the latest IHS Markit Report, the average age of vehicles has hit a record of 11.9 years. For the smooth functioning of the aging vehicles, customers are spending heavily to replace any faulty parts and components. The longevity of vehicles is in turn driving the auto replacement industry.
Digitization a Key Catalyst: A paradigm shift toward electric and driverless vehicles is making it necessary for the industry players to revamp their business models in order to adjust with the changing dynamics. Amid the growing popularity of such vehicles, the demand for technologically advanced auto parts and tools is rising. High-tech vehicles are inducing customers to seek professional assistance instead of opting for DIY (“Do It Yourself”).
Used Car Market on Growth Track: Coronavirus-led social distancing is reducing the popularity of public transportation. Private transportation is the need of the hour and amid economic slowdown concerns. With sales of used vehicles faring better than new cars, the demand of auto replacement parts is rising. Also, consumers who were earlier keen on purchasing new vehicles or upgrading to new models now prefer to replace the worn-out parts of their existing vehicles. Either way, demand for auto replacement parts is on the rise.
Zacks Industry Rank Paints a Rosy Picture
The Zacks Automotive – Replacements Partsindustry is an eight-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #21, which places it in the top 8% 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 outperforms 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 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 six months, the industry’s earnings estimates for 2020 have moved up 35%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Automotive – Replacement Parts industry has lagged the Auto, Tires and Truck sector and Zacks S&P 500 composite over the past year. The industry has witnessed a decline of 9.8% against the S&P 500 and sector’s rise of 14.4% and 46.6%, 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. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 9.58X compared with the S&P 500’s 14.79X and the sector’s trailing-12-month EV/EBITDA of 16.83X.
Over the past five years, the industry has traded as high as 15.38X, as low as 6.82X and at a median of 12.76X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
4 Stocks Worth Investing in Now
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.The Inenco buyout is a significant addition to Genuine Parts' global industrial portfolio, which is driving the company. Aggressive e-commerce initiatives, investor-friendly moves and operational efficiency are other positives.The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 12.5% and 5.8%, respectively. Genuine Parts currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: GPC
Standard Motor: New York-based Standard Motor is one of the leading manufacturers and distributors of premium automotive replacement parts for engine management, as well as temperature control systems. The Pollak business buyout is boosting Standard Motor’s engine management segment’s prospects, and leading to various commercial as well as operational synergies. A healthy balance sheet and cost-cut measures undertaken by this Zacks Rank #1 Rank firm bode well. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 14.3% and 4.5%, respectively.
Price and Consensus: SMP
LKQ Corp: Headquartered in Illinois, LKQ Corp. is one of the leading providers of replacement parts, components and systems. Frequent acquisitions by the firm to expand geographic footprint, improve customer offerings and adopt new technologies are buoying growth prospects. Balance sheet strength, soaring free cash flow and cost discipline are boosting investors’ optimism on the stock. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 13% and 5.3%, respectively. The company currently carries a Zacks Rank #2 (Buy).
Price and Consensus: LKQ
Dorman Products: Pennsylvania-based Dorman Products is a leading supplier of automotive and heavy duty replacement parts. The company serves customers in the United States and Asia. Acquisitions of Flight Systems Automotive Group and MAS Automotive Distribution Inc. have taken Dorman’s game a notch higher. Solid stock buyback programs underscore management’s commitment to return capital to shareholders. Solid financials are also likely to help this Zacks Rank #2 company tide over coronavirus-led uncertainty. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 18.1% and 8%, respectively.
Price and Consensus: DORM
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Image: Bigstock
Auto Replacement Parts Industry Shines Bright: 4 Winners
The Zacks Automotive- Replacements Parts industry is thriving on the back of increasing average age of vehicles, which is boosting the demand of auto repair, maintenance and replacement parts. Also, amid growing concerns of economic slowdown, customers are expected to opt for repairing old vehicles rather than splurging on new vehicles that are highly priced.
Widespread usage of technology is resulting in fundamental restructuring of the auto market. The automotive replacement parts industry needs to develop a detailed roadmap to make the most out of the opportunities in a changing market scenario. Industry players including Genuine Parts Company (GPC - Free Report) , LKQ Corporation (LKQ - Free Report) , Dorman Products, Inc. (DORM - Free Report) and Standard Motor Products, Inc. (SMP - Free Report) are poised to gain.
Industry Info
The Zacks Automotive- Replacements 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. A few of the important auto replacement components include engine, steering, drive axle, suspension, brakes and gearbox parts.
3 Trends Influencing the Auto Replacements Parts Industry
Aging Vehicles a Boon: Increasing average age of cars is fueling demand for auto replacement parts. Per the latest IHS Markit Report, the average age of vehicles has hit a record of 11.9 years. For the smooth functioning of the aging vehicles, customers are spending heavily to replace any faulty parts and components. The longevity of vehicles is in turn driving the auto replacement industry.
Digitization a Key Catalyst: A paradigm shift toward electric and driverless vehicles is making it necessary for the industry players to revamp their business models in order to adjust with the changing dynamics. Amid the growing popularity of such vehicles, the demand for technologically advanced auto parts and tools is rising. High-tech vehicles are inducing customers to seek professional assistance instead of opting for DIY (“Do It Yourself”).
Used Car Market on Growth Track: Coronavirus-led social distancing is reducing the popularity of public transportation. Private transportation is the need of the hour and amid economic slowdown concerns. With sales of used vehicles faring better than new cars, the demand of auto replacement parts is rising. Also, consumers who were earlier keen on purchasing new vehicles or upgrading to new models now prefer to replace the worn-out parts of their existing vehicles. Either way, demand for auto replacement parts is on the rise.
Zacks Industry Rank Paints a Rosy Picture
The Zacks Automotive – Replacements Partsindustry is an eight-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #21, which places it in the top 8% 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 outperforms 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 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 six months, the industry’s earnings estimates for 2020 have moved up 35%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Automotive – Replacement Parts industry has lagged the Auto, Tires and Truck sector and Zacks S&P 500 composite over the past year. The industry has witnessed a decline of 9.8% against the S&P 500 and sector’s rise of 14.4% and 46.6%, 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. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 9.58X compared with the S&P 500’s 14.79X and the sector’s trailing-12-month EV/EBITDA of 16.83X.
Over the past five years, the industry has traded as high as 15.38X, as low as 6.82X and at a median of 12.76X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
4 Stocks Worth Investing in Now
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.The Inenco buyout is a significant addition to Genuine Parts' global industrial portfolio, which is driving the company. Aggressive e-commerce initiatives, investor-friendly moves and operational efficiency are other positives.The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 12.5% and 5.8%, respectively. Genuine Parts currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: GPC
Standard Motor: New York-based Standard Motor is one of the leading manufacturers and distributors of premium automotive replacement parts for engine management, as well as temperature control systems. The Pollak business buyout is boosting Standard Motor’s engine management segment’s prospects, and leading to various commercial as well as operational synergies. A healthy balance sheet and cost-cut measures undertaken by this Zacks Rank #1 Rank firm bode well. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 14.3% and 4.5%, respectively.
Price and Consensus: SMP
LKQ Corp: Headquartered in Illinois, LKQ Corp. is one of the leading providers of replacement parts, components and systems. Frequent acquisitions by the firm to expand geographic footprint, improve customer offerings and adopt new technologies are buoying growth prospects. Balance sheet strength, soaring free cash flow and cost discipline are boosting investors’ optimism on the stock. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 13% and 5.3%, respectively. The company currently carries a Zacks Rank #2 (Buy).
Price and Consensus: LKQ
Dorman Products: Pennsylvania-based Dorman Products is a leading supplier of automotive and heavy duty replacement parts. The company serves customers in the United States and Asia. Acquisitions of Flight Systems Automotive Group and MAS Automotive Distribution Inc. have taken Dorman’s game a notch higher. Solid stock buyback programs underscore management’s commitment to return capital to shareholders. Solid financials are also likely to help this Zacks Rank #2 company tide over coronavirus-led uncertainty. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 18.1% and 8%, respectively.
Price and Consensus: DORM
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.
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