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Want to Play the Auto Retail Parts Industry? 4 Stocks in Focus
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As cars are getting technologically advanced with each passing day, the demand for high-quality auto parts is on the rise, in turn opening new doors of opportunities for the Zacks Automotive - Retail & Wholesale - Parts industry. The industry is undergoing radical change, with evolving customer expectations and technological innovation acting as game changers.
While global chip shortage may act as a near-term headwind, the industry is showing signs of promise amid increasing e-commerce initiatives, rising demand for electric vehicles (EVs) and deep focus on cost-containment efforts. Stocks including O’Reilly Automotive (ORLY - Free Report) , AutoZone (AZO - Free Report) , CarMax (KMX - Free Report) and Advance Auto Parts (AAP - Free Report) stand to benefit from improving industry fundamentals.
About the Industry
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. Consumers have two options, either they can opt for repairing their 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).
Key Industry Trends to Watch Out for
Tech Advancement Acting as a Catalyst: The Auto Retail & Wholesales Parts industry is undergoing massive transformation with increase in the number of new, complicated and high-tech vehicles that require more professional assistance rather than DIY. Ramp up of digital capabilities is restructuring the auto retail and wholesale parts industry. With the pandemic leading to wide adoption of online services, several dealers are ramping up investment in e-commerce tools, which are set to buoy their prospects.
Rising EV Popularity Boosting Opportunities: Transition toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. The shift is creating new opportunities for the industry in the form of more sophisticated products and services, thanks to growing demand for complex technology embedded cars.
Cost Management Getting Utmost Focus: While changing dynamics of the industry open new avenues, there may be some temporary issues — including a rise in SG&A costs to pursue omnichannel goals and provide superior customer service, as well as increased investments to develop technology platforms — that need to be addressed to stay ahead of the game. The auto retail and wholesale parts industry needs to develop a detailed roadmap to make the most out of the opportunities amid the changing market scenario.
Chip Crunch to Play Spoilsport: Various auto bigwigs have been warning investors about slowing production due to supply shortage of semiconductors and are thus resorting to production cuts.The shortage of semiconductor supply is hampering the balance between demand and supply, and is likely to deal a massive blow to vehicle production, especially in first-half 2021. The auto retail and wholesale parts industry’s near-term revenues and earnings are likely to get impacted by the semiconductor shortfall.
What Does Zacks Industry Rank Indicate?
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 #108, which places it in the top 43% of more than 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. The industry’s earnings estimates for 2021 have moved up 0.4% over the past year.
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 Underperforms 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 increased 12.3% over this period compared with the S&P 500 and sector’s rise of 18.5% and 96.4%, 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 23.16X compared with the S&P 500’s 16.67X and the sector’s 21.21X.
Over the past five years, the industry has traded as high as 26.5X, as low as 15.87X and at a median of 21.49X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
Stocks To be on Your Watchlist
O’Reilly: O'Reilly is one of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The specialty auto parts retailer is poised to benefit from store openings and distribution centers in profitable regions. It has been generating record revenues for 28 consecutive years.O’Reilly — presently carrying a Zacks Rank #3 (Hold) and a VGM Score of A — boasts a wide-ranging product that is driving comparable store sales growth. It has an impressive surprise history, with earnings topping estimates in each of the trailing four quarters, with an average of 23.5%. The Zacks Consensus Estimate for fiscal 2022 earnings and sales implies year-over-year growth of 12% and 7%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: ORLY
AutoZone: AutoZone is one of the leading specialty retailers and distributors of automotive replacement parts, as well as accessories in the United States. The company has been generating record revenues for 29 consecutive years on the back of stable growth in the auto parts market and expansion of the store base. AutoZone — which currently carries a Zacks Rank #3 and a VGM Score of A — flaunts a stellar surprise history, with earnings beating estimates in each of the trailing four quarters, with an average of 9.6%. The Zacks Consensus Estimate for fiscal 2022 earnings and sales implies year-over-year growth of 12% and 4%, respectively.
Price & Consensus: AZO
CarMax: Headquartered in Richmond, VA, CarMax operates as a specialty retailer of used and new vehicles.Omni-channel offerings, store-expansion initiatives, fast delivery and high-quality products are fuelling the firm’s prospects. CarMax has an impressive surprise history, with earnings topping estimates in each of the trailing four quarters, with an average of 150.3%. The Zacks Consensus Estimate for fiscal 2022 earnings and sales implies year-over-year growth of 30.9% and 16.3%, respectively. The company carries a Zacks Rank #3 and a VGM Score of B, at present.
Price & Consensus: KMX
Advance Auto Parts: Advance Auto Parts 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 the firm’s footprint by opening new stores, widening online presence and strategic collaborations bode well for Advance Auto Parts, which presently carries a Zacks Rank #3 and flaunts a VGM Score of A. It has a decent surprise history, with earnings beating estimates thrice in the trailing four quarters and missing once, with an average surprise of 8%. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 13.7% and 1.3%, respectively.
Price & Consensus: AAP
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Image: Bigstock
Want to Play the Auto Retail Parts Industry? 4 Stocks in Focus
As cars are getting technologically advanced with each passing day, the demand for high-quality auto parts is on the rise, in turn opening new doors of opportunities for the Zacks Automotive - Retail & Wholesale - Parts industry. The industry is undergoing radical change, with evolving customer expectations and technological innovation acting as game changers.
While global chip shortage may act as a near-term headwind, the industry is showing signs of promise amid increasing e-commerce initiatives, rising demand for electric vehicles (EVs) and deep focus on cost-containment efforts. Stocks including O’Reilly Automotive (ORLY - Free Report) , AutoZone (AZO - Free Report) , CarMax (KMX - Free Report) and Advance Auto Parts (AAP - Free Report) stand to benefit from improving industry fundamentals.
About the Industry
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. Consumers have two options, either they can opt for repairing their 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).
Key Industry Trends to Watch Out for
Tech Advancement Acting as a Catalyst: The Auto Retail & Wholesales Parts industry is undergoing massive transformation with increase in the number of new, complicated and high-tech vehicles that require more professional assistance rather than DIY. Ramp up of digital capabilities is restructuring the auto retail and wholesale parts industry. With the pandemic leading to wide adoption of online services, several dealers are ramping up investment in e-commerce tools, which are set to buoy their prospects.
Rising EV Popularity Boosting Opportunities: Transition toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. The shift is creating new opportunities for the industry in the form of more sophisticated products and services, thanks to growing demand for complex technology embedded cars.
Cost Management Getting Utmost Focus: While changing dynamics of the industry open new avenues, there may be some temporary issues — including a rise in SG&A costs to pursue omnichannel goals and provide superior customer service, as well as increased investments to develop technology platforms — that need to be addressed to stay ahead of the game. The auto retail and wholesale parts industry needs to develop a detailed roadmap to make the most out of the opportunities amid the changing market scenario.
Chip Crunch to Play Spoilsport: Various auto bigwigs have been warning investors about slowing production due to supply shortage of semiconductors and are thus resorting to production cuts.The shortage of semiconductor supply is hampering the balance between demand and supply, and is likely to deal a massive blow to vehicle production, especially in first-half 2021. The auto retail and wholesale parts industry’s near-term revenues and earnings are likely to get impacted by the semiconductor shortfall.
What Does Zacks Industry Rank Indicate?
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 #108, which places it in the top 43% of more than 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. The industry’s earnings estimates for 2021 have moved up 0.4% over the past year.
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 Underperforms 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 increased 12.3% over this period compared with the S&P 500 and sector’s rise of 18.5% and 96.4%, 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 23.16X compared with the S&P 500’s 16.67X and the sector’s 21.21X.
Over the past five years, the industry has traded as high as 26.5X, as low as 15.87X and at a median of 21.49X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
Stocks To be on Your Watchlist
O’Reilly: O'Reilly is one of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The specialty auto parts retailer is poised to benefit from store openings and distribution centers in profitable regions. It has been generating record revenues for 28 consecutive years.O’Reilly — presently carrying a Zacks Rank #3 (Hold) and a VGM Score of A — boasts a wide-ranging product that is driving comparable store sales growth. It has an impressive surprise history, with earnings topping estimates in each of the trailing four quarters, with an average of 23.5%. The Zacks Consensus Estimate for fiscal 2022 earnings and sales implies year-over-year growth of 12% and 7%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: ORLY
AutoZone: AutoZone is one of the leading specialty retailers and distributors of automotive replacement parts, as well as accessories in the United States. The company has been generating record revenues for 29 consecutive years on the back of stable growth in the auto parts market and expansion of the store base. AutoZone — which currently carries a Zacks Rank #3 and a VGM Score of A — flaunts a stellar surprise history, with earnings beating estimates in each of the trailing four quarters, with an average of 9.6%. The Zacks Consensus Estimate for fiscal 2022 earnings and sales implies year-over-year growth of 12% and 4%, respectively.
Price & Consensus: AZO
CarMax: Headquartered in Richmond, VA, CarMax operates as a specialty retailer of used and new vehicles.Omni-channel offerings, store-expansion initiatives, fast delivery and high-quality products are fuelling the firm’s prospects. CarMax has an impressive surprise history, with earnings topping estimates in each of the trailing four quarters, with an average of 150.3%. The Zacks Consensus Estimate for fiscal 2022 earnings and sales implies year-over-year growth of 30.9% and 16.3%, respectively. The company carries a Zacks Rank #3 and a VGM Score of B, at present.
Price & Consensus: KMX
Advance Auto Parts: Advance Auto Parts 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 the firm’s footprint by opening new stores, widening online presence and strategic collaborations bode well for Advance Auto Parts, which presently carries a Zacks Rank #3 and flaunts a VGM Score of A. It has a decent surprise history, with earnings beating estimates thrice in the trailing four quarters and missing once, with an average surprise of 8%. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 13.7% and 1.3%, respectively.
Price & Consensus: AAP
Legal Marijuana: An Investor’s Dream
Imagine getting in early on a young industry primed to skyrocket from $17.7 billion in 2019 to an expected $73.6 billion by 2027.
Although marijuana stocks did better as the pandemic took hold than the market as a whole, they’ve been pushed down. This is exactly the right time to get in on selected strong companies at a fraction of their value before COVID struck. Zacks’ Special Report, Marijuana Moneymakers, reveals 10 exciting tickers for urgent consideration.
Download Marijuana Moneymakers FREE >>