We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
3 Auto Replacement Parts Stocks That Are Showing Resilience
Read MoreHide Full Article
The shift toward high-tech vehicles has compelled participants in the Zacks Automotive Replacement Parts industry to realign their business models strategically. To leverage evolving market dynamics, companies must devise comprehensive roadmaps that optimize available opportunities. Effectively managing high operational costs has become the key, prompting industry players to prioritize the cost-effective development of parts and components to safeguard their market share.
Profit margins face challenges from high raw material expenses, supply chain vulnerabilities amid geopolitical tensions, adverse foreign exchange translations and logistical hurdles. However, amid these obstacles, the aging vehicles and the increasing trend toward digitization offer a glimmer of hope. In this landscape, LKQ Corporation (LKQ - Free Report) , Dorman Products (DORM - Free Report) and Standard Motor Products (SMP - Free Report) stand out positively due to their strategic acquisitions and initiatives that resonate well with investors.
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 avail of 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 Boosts Replacement Demand: As indicated by the S&P Global Mobility report unveiled in May 2023, the average age of cars and light trucks in the United States reached 12.5 years last year. This signifies the sixth consecutive year of an increase in average vehicle age and the most significant annual rise since the 2008-2009 recession. The accelerated growth in the average age of light vehicles brings benefits to the automotive replacement sector. A fleet of older vehicles implies an ongoing need for repairs and maintenance to ensure proper functionality. In tandem with the rising average vehicle age, the industry is experiencing growth as consumers allocate more resources to sustain the operation of their aging automobiles. Consequently, there has been a noticeable surge in the demand for automotive replacement parts.
Supply Chain Strain Amid Red Sea Crisis: The auto replacement sector is poised for challenges as supply chains encounter vulnerability amid shipping disruptions. Elevated logistic hurdles and supply chain interruptions, triggered by persistent attacks from Houthi rebels in the Red Sea, might prove to be a spoiler. Despite the initial expectations of waning inflation in 2024, manufacturers and retailers are grappling with delays and increased expenses. The ongoing Red Sea crisis, which has disrupted a vital shipping route through the Suez Canal, is expected to take a toll on the vehicle industry. This crisis is a test of resilience for the auto supply chain, with the disruptions resulting in a surge in transportation costs.
Cost Headwinds Prevail: The auto replacement industry is grappling with challenges arising from high raw material and labor costs. Although there has been alleviation of raw material costs, they still exceed pre-pandemic levels. The lingering impact of inflation is expected to continue over the short haul, putting pressure on the margins of auto replacement firms. Additionally, the widespread global presence of most industry participants exposes them to potential difficulties related to foreign exchange. Adverse currency translations are expected to have a detrimental impact on earnings and margins.
Challenges Amid Tech Advancements: The rising adoption of electric vehicles has prompted substantial investments in the advancement of cutting-edge automotive components. Yet, the elevated costs associated with these technologies present a notable hurdle to the profitability of auto replacement parts. As the industry adapts to the dynamic trends and requirements of the automotive market, companies face the ongoing challenge of consistently enhancing and updating their product offerings. This entails significant capital investments and research and development expenditures. Consequently, these costs are expected to strain operating margins and cash flows within the industry.
Digital Overhaul Impact: The rise of e-commerce and online retail has fundamentally transformed the landscape of the auto replacement parts industry, offering unparalleled accessibility, a diverse range of options and enhanced convenience for consumers. Online platforms enable customers to effortlessly compare a vast selection of replacement parts, peruse reviews and access comprehensive product information, facilitating well-informed purchasing decisions. With the global reach of e-commerce, customers can now procure specialized parts from various regions. This digital evolution is advantageous for both "Do-It-Yourself" enthusiasts and professional mechanics, streamlining the process of locating and obtaining necessary components.
Zacks Industry Rank Paints a Dull Picture
The Zacks Automotive – Replacements Parts industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #173, which places it in the bottom 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 bleak 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since October 2023, the industry’s earnings estimates for 2024 have moved 2.2% south.
Despite the industry’s muted near-term outlook, we will present three stocks worth a watch. But before that, let's take a look at the industry’s stock market performance and current valuation.
Industry Lags Sector and S&P 500
The Zacks Automotive – Replacement Parts industry has underperformed the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has declined 16% against the sector and the S&P 500’s growth of 25.8% and 20.4%, 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. On the basis of trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 9.91X compared with the S&P 500’s 13.94X and the sector’s trailing-12-month EV/EBITDA of 13.54X. Over the past five years, the industry has traded as high as 13.83X, as low as 7.38X and at a median of 10.75X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
3 Stocks Worth a Watch
LKQ: Headquartered in Illinois, LKQ is one of the leading providers of replacement parts, components and systems. The acquisition of Uni-Select Inc. for $2.1 billion—completed in August 2023—is set to bolster its global automotive vehicle parts distribution business. By the third year, the strategic acquisition is expected to generate an annual run-rate cost synergy of $55 million. LKQ generated robust FCF of around $1 billion in 2020, 2021 and 2022 and remains on track to achieve $1 billion in 2023 as well.
Investment-grade ratings from Standard & Poor’s, Moody’s, and Fitch instill confidence. As a sign of its solid cash flow generation ability and robust financials, the company is committed to maximizing shareholders’ value via dividends and share repurchases. The Zacks Consensus Estimate for LKQ’s 2024 sales and earnings implies year-over-year growth of 10.5% and 12%, respectively, from the 2023 estimated figures. The consensus estimate for 2024 EPS has moved up 2 cents in the past 30 days. LKQ currently carries a Zacks Rank #3 (Hold) and a VGM Score of A.
Price & Consensus: LKQ
Dorman: Based in Pennsylvania, the company is a prominent supplier within the motor vehicle aftermarket industry, specializing in replacement and upgrade parts. Continuously expanding its product range, Dorman introduces hundreds of new direct replacement parts and assemblies crafted to match or enhance the performance of original equipment offerings. The company's 2022 net sales reached $1.7 billion, reflecting a five-year CAGR of 14%. The strategic acquisition of Super ATV has played a pivotal role in elevating the company's overall prospects.
Dorman's commitment to frequent product launches and ongoing innovation serves as a catalyst for sustained growth. With a robust balance sheet boasting a manageable leverage of 34% and substantial liquidity, Dorman is well-positioned for success. Investor-friendly moves via share buybacks further instill confidence. The Zacks Consensus Estimate for DORM’s 2024 sales and earnings implies year-over-year growth of 5.7% and 19%, respectively, from the 2023 estimated figures. Dorman currently carries a Zacks Rank #3 and a VGM Score of A.
Price & Consensus: DORM
Standard Motor: Based in New York, this company is one of the leading manufacturers, distributors and marketers of premium automotive replacement parts for engine management and temperature control systems. The company’s brand recognition, sizable customer base and favorable manufacturing footprint, with facilities in North America and Poland, bode well. New business wins are likely to boost revenues across all segments. As hybrid and EV sales are on the rise, SMP is set to meet the growing demand for high-quality replacement parts and is poised for revenue growth and new opportunities.
The company's long-term debt-to-capital ratio of 0.18 gives it enough financial flexibility to tap into growth opportunities. Enhancement of shareholder value via dividends and buybacks also instills confidence. The company has increased dividends four times in the last five years, with an annualized growth of 5.5%. The Zacks Consensus Estimate for SMP’s 2024 sales and earnings implies year-over-year growth of 3.3% and 9%, respectively, from the 2023 estimated figures. Standard Motor currently carries a Zacks Rank #3 and a VGM Score of A.
Image: Bigstock
3 Auto Replacement Parts Stocks That Are Showing Resilience
The shift toward high-tech vehicles has compelled participants in the Zacks Automotive Replacement Parts industry to realign their business models strategically. To leverage evolving market dynamics, companies must devise comprehensive roadmaps that optimize available opportunities. Effectively managing high operational costs has become the key, prompting industry players to prioritize the cost-effective development of parts and components to safeguard their market share.
Profit margins face challenges from high raw material expenses, supply chain vulnerabilities amid geopolitical tensions, adverse foreign exchange translations and logistical hurdles. However, amid these obstacles, the aging vehicles and the increasing trend toward digitization offer a glimmer of hope. In this landscape, LKQ Corporation (LKQ - Free Report) , Dorman Products (DORM - Free Report) and Standard Motor Products (SMP - Free Report) stand out positively due to their strategic acquisitions and initiatives that resonate well with investors.
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 avail of 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 Boosts Replacement Demand: As indicated by the S&P Global Mobility report unveiled in May 2023, the average age of cars and light trucks in the United States reached 12.5 years last year. This signifies the sixth consecutive year of an increase in average vehicle age and the most significant annual rise since the 2008-2009 recession. The accelerated growth in the average age of light vehicles brings benefits to the automotive replacement sector. A fleet of older vehicles implies an ongoing need for repairs and maintenance to ensure proper functionality. In tandem with the rising average vehicle age, the industry is experiencing growth as consumers allocate more resources to sustain the operation of their aging automobiles. Consequently, there has been a noticeable surge in the demand for automotive replacement parts.
Supply Chain Strain Amid Red Sea Crisis: The auto replacement sector is poised for challenges as supply chains encounter vulnerability amid shipping disruptions. Elevated logistic hurdles and supply chain interruptions, triggered by persistent attacks from Houthi rebels in the Red Sea, might prove to be a spoiler. Despite the initial expectations of waning inflation in 2024, manufacturers and retailers are grappling with delays and increased expenses. The ongoing Red Sea crisis, which has disrupted a vital shipping route through the Suez Canal, is expected to take a toll on the vehicle industry. This crisis is a test of resilience for the auto supply chain, with the disruptions resulting in a surge in transportation costs.
Cost Headwinds Prevail: The auto replacement industry is grappling with challenges arising from high raw material and labor costs. Although there has been alleviation of raw material costs, they still exceed pre-pandemic levels. The lingering impact of inflation is expected to continue over the short haul, putting pressure on the margins of auto replacement firms. Additionally, the widespread global presence of most industry participants exposes them to potential difficulties related to foreign exchange. Adverse currency translations are expected to have a detrimental impact on earnings and margins.
Challenges Amid Tech Advancements: The rising adoption of electric vehicles has prompted substantial investments in the advancement of cutting-edge automotive components. Yet, the elevated costs associated with these technologies present a notable hurdle to the profitability of auto replacement parts. As the industry adapts to the dynamic trends and requirements of the automotive market, companies face the ongoing challenge of consistently enhancing and updating their product offerings. This entails significant capital investments and research and development expenditures. Consequently, these costs are expected to strain operating margins and cash flows within the industry.
Digital Overhaul Impact: The rise of e-commerce and online retail has fundamentally transformed the landscape of the auto replacement parts industry, offering unparalleled accessibility, a diverse range of options and enhanced convenience for consumers. Online platforms enable customers to effortlessly compare a vast selection of replacement parts, peruse reviews and access comprehensive product information, facilitating well-informed purchasing decisions. With the global reach of e-commerce, customers can now procure specialized parts from various regions. This digital evolution is advantageous for both "Do-It-Yourself" enthusiasts and professional mechanics, streamlining the process of locating and obtaining necessary components.
Zacks Industry Rank Paints a Dull Picture
The Zacks Automotive – Replacements Parts industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #173, which places it in the bottom 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 bleak 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since October 2023, the industry’s earnings estimates for 2024 have moved 2.2% south.
Despite the industry’s muted near-term outlook, we will present three stocks worth a watch. But before that, let's take a look at the industry’s stock market performance and current valuation.
Industry Lags Sector and S&P 500
The Zacks Automotive – Replacement Parts industry has underperformed the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has declined 16% against the sector and the S&P 500’s growth of 25.8% and 20.4%, 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. On the basis of trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 9.91X compared with the S&P 500’s 13.94X and the sector’s trailing-12-month EV/EBITDA of 13.54X. Over the past five years, the industry has traded as high as 13.83X, as low as 7.38X and at a median of 10.75X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
3 Stocks Worth a Watch
LKQ: Headquartered in Illinois, LKQ is one of the leading providers of replacement parts, components and systems. The acquisition of Uni-Select Inc. for $2.1 billion—completed in August 2023—is set to bolster its global automotive vehicle parts distribution business. By the third year, the strategic acquisition is expected to generate an annual run-rate cost synergy of $55 million. LKQ generated robust FCF of around $1 billion in 2020, 2021 and 2022 and remains on track to achieve $1 billion in 2023 as well.
Investment-grade ratings from Standard & Poor’s, Moody’s, and Fitch instill confidence. As a sign of its solid cash flow generation ability and robust financials, the company is committed to maximizing shareholders’ value via dividends and share repurchases. The Zacks Consensus Estimate for LKQ’s 2024 sales and earnings implies year-over-year growth of 10.5% and 12%, respectively, from the 2023 estimated figures. The consensus estimate for 2024 EPS has moved up 2 cents in the past 30 days. LKQ currently carries a Zacks Rank #3 (Hold) and a VGM Score of A.
Price & Consensus: LKQ
Dorman: Based in Pennsylvania, the company is a prominent supplier within the motor vehicle aftermarket industry, specializing in replacement and upgrade parts. Continuously expanding its product range, Dorman introduces hundreds of new direct replacement parts and assemblies crafted to match or enhance the performance of original equipment offerings. The company's 2022 net sales reached $1.7 billion, reflecting a five-year CAGR of 14%. The strategic acquisition of Super ATV has played a pivotal role in elevating the company's overall prospects.
Dorman's commitment to frequent product launches and ongoing innovation serves as a catalyst for sustained growth. With a robust balance sheet boasting a manageable leverage of 34% and substantial liquidity, Dorman is well-positioned for success. Investor-friendly moves via share buybacks further instill confidence. The Zacks Consensus Estimate for DORM’s 2024 sales and earnings implies year-over-year growth of 5.7% and 19%, respectively, from the 2023 estimated figures. Dorman currently carries a Zacks Rank #3 and a VGM Score of A.
Price & Consensus: DORM
Standard Motor: Based in New York, this company is one of the leading manufacturers, distributors and marketers of premium automotive replacement parts for engine management and temperature control systems. The company’s brand recognition, sizable customer base and favorable manufacturing footprint, with facilities in North America and Poland, bode well. New business wins are likely to boost revenues across all segments. As hybrid and EV sales are on the rise, SMP is set to meet the growing demand for high-quality replacement parts and is poised for revenue growth and new opportunities.
The company's long-term debt-to-capital ratio of 0.18 gives it enough financial flexibility to tap into growth opportunities. Enhancement of shareholder value via dividends and buybacks also instills confidence. The company has increased dividends four times in the last five years, with an annualized growth of 5.5%. The Zacks Consensus Estimate for SMP’s 2024 sales and earnings implies year-over-year growth of 3.3% and 9%, respectively, from the 2023 estimated figures. Standard Motor currently carries a Zacks Rank #3 and a VGM Score of A.
Price & Consensus: SMP
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.