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.
2 Auto Replacement Stocks to Watch Despite Industry Headwinds
Read MoreHide Full Article
The increasing age of vehicles is a boon for the Zacks Automotive Replacement Parts industry. However, the overall outlook of the industry remains subdued due to high raw material costs, unfavorable currency exchanges and logistical challenges that impact profit margins. Additionally, the shift toward electric and self-driving vehicles necessitates realignment of business models. To thrive, companies must develop comprehensive strategies to capitalize on evolving market trends while managing high operational costs. Industry players like Genuine Parts Company (GPC - Free Report) and Dorman Products (DORM - Free Report) are better placed to navigate the industry’s woes.
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 professional services for the same. The industry is undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
What's Shaping the Industry's Dynamics?
Aging Vehicles Serve as a Catalyst: The average age of U.S. vehicles hit a new record of 12.6 years in 2024, an increase of two months from 2023. This marks the seventh consecutive year of rising average vehicle age in the United States. Increasing vehicle longevity bodes well for 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.
Cost & Inflationary Pressure: The auto replacement industry is grappling with high raw material and labor costs. Although raw material costs have decreased, they are still above pre-pandemic levels. Inflation is impacting various aspects of the industry's businesses, including product, overhead and supply chain costs. This could lead to increased expenses that the company might struggle to offset through price hikes or efficiency measures. Furthermore, the industry's global operations expose companies to foreign exchange fluctuations, which can affect earnings and margins.
Tech Advancements Might Hurt Margins: The increasing adoption of electric vehicles has driven significant investments in advanced automotive components. However, the high costs associated with these technologies challenge the profitability of auto replacement parts. As the industry adapts to changing market demands, companies must continuously enhance and update their products, necessitating substantial capital investment and research and development expenses. These costs are likely to exert pressure on operating margins and cash flows within the industry.
Zacks Industry Rank Signals Gloomy Prospects
The Zacks Automotive – Replacements Parts industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #206, which places it in the bottom 18% 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. Over the past year, the industry’s earnings estimates for 2024 have moved 4.5% south.
Despite the industry’s muted near-term outlook, we will present you with two stocks that are worth considering. 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 19.6% against the S&P 500’s growth of 27%. Meanwhile, the sector has declined roughly 7% during the said 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 9.79X compared with the S&P 500’s 20.1X and the sector’s trailing 12-month EV/EBITDA of 17.05X. Over the past five years, the industry has traded as high as 13.19X, as low as 7.42X and at a median of 10.84X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Watch
Genuine Parts: The company distributes automotive and industrial replacement parts and materials. Its automotive and industrial businesses are capitalizing on favorable market trends. The automotive segment is thriving due to an increase in miles driven, aging vehicles and higher new and used car prices, boosting demand for replacement parts. The industrial segment is also performing well, driven by manufacturing growth and a broad customer base across various end markets. Acquisitions of KDG, Gaudi and Motor Parts & Equipment Corporation have bolstered GPC’s market position.
GPC’s focus on improving supply chain efficiency and customer service through strategic initiatives bodes well. Solid liquidity of $2.5 billion (at the end of the first quarter of 2024) and manageable leverage of 40% provide financial flexibility to tap growth opportunities. The company's dividend aristocrat status is commendable.
The Zacks Consensus Estimate for GPC’s 2024 sales and earnings implies year-over-year growth of 3% and 6%, respectively. The consensus mark for 2025 sales and EPS suggests an uptick of another 4% and 9%, respectively, on a year-over-year basis. GPC currently carries a Zacks Rank #3 (Hold) and has a VGM Score of A.
Price & Consensus: GPC
Dorman: The company is a key player in the motor vehicle aftermarket industry, focusing on replacement and upgrade parts. Dorman consistently expands its product line, introducing hundreds of new direct replacement parts and assemblies designed to match or improve upon the performance of original equipment. In 2023, the company reached record annual sales of $1.93 billion, marking a 13% increase year over year. First-quarter 2024 sales saw a modest growth of 0.4% year over year.
The acquisition of Super ATV has significantly boosted the company's overall prospects. Dorman's dedication to regular product launches and ongoing innovation fuels its sustained growth. With a strong balance sheet, a manageable debt-to-capitalization ratio of 29% (compared to the industry average of 55%) and ample liquidity, Dorman is well-poised 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 4% and 24%, respectively. The consensus mark for 2025 sales and EPS suggests an uptick of another 5% and 12%, respectively, on a year-over-year basis. Dorman currently carries a Zacks Rank #3 and has a VGM Score of A.
Image: Bigstock
2 Auto Replacement Stocks to Watch Despite Industry Headwinds
The increasing age of vehicles is a boon for the Zacks Automotive Replacement Parts industry. However, the overall outlook of the industry remains subdued due to high raw material costs, unfavorable currency exchanges and logistical challenges that impact profit margins. Additionally, the shift toward electric and self-driving vehicles necessitates realignment of business models. To thrive, companies must develop comprehensive strategies to capitalize on evolving market trends while managing high operational costs. Industry players like Genuine Parts Company (GPC - Free Report) and Dorman Products (DORM - Free Report) are better placed to navigate the industry’s woes.
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 professional services for the same. The industry is undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
What's Shaping the Industry's Dynamics?
Aging Vehicles Serve as a Catalyst: The average age of U.S. vehicles hit a new record of 12.6 years in 2024, an increase of two months from 2023. This marks the seventh consecutive year of rising average vehicle age in the United States. Increasing vehicle longevity bodes well for 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.
Cost & Inflationary Pressure: The auto replacement industry is grappling with high raw material and labor costs. Although raw material costs have decreased, they are still above pre-pandemic levels. Inflation is impacting various aspects of the industry's businesses, including product, overhead and supply chain costs. This could lead to increased expenses that the company might struggle to offset through price hikes or efficiency measures. Furthermore, the industry's global operations expose companies to foreign exchange fluctuations, which can affect earnings and margins.
Tech Advancements Might Hurt Margins: The increasing adoption of electric vehicles has driven significant investments in advanced automotive components. However, the high costs associated with these technologies challenge the profitability of auto replacement parts. As the industry adapts to changing market demands, companies must continuously enhance and update their products, necessitating substantial capital investment and research and development expenses. These costs are likely to exert pressure on operating margins and cash flows within the industry.
Zacks Industry Rank Signals Gloomy Prospects
The Zacks Automotive – Replacements Parts industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #206, which places it in the bottom 18% 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. Over the past year, the industry’s earnings estimates for 2024 have moved 4.5% south.
Despite the industry’s muted near-term outlook, we will present you with two stocks that are worth considering. 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 19.6% against the S&P 500’s growth of 27%. Meanwhile, the sector has declined roughly 7% during the said 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 9.79X compared with the S&P 500’s 20.1X and the sector’s trailing 12-month EV/EBITDA of 17.05X. Over the past five years, the industry has traded as high as 13.19X, as low as 7.42X and at a median of 10.84X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Watch
Genuine Parts: The company distributes automotive and industrial replacement parts and materials. Its automotive and industrial businesses are capitalizing on favorable market trends. The automotive segment is thriving due to an increase in miles driven, aging vehicles and higher new and used car prices, boosting demand for replacement parts. The industrial segment is also performing well, driven by manufacturing growth and a broad customer base across various end markets. Acquisitions of KDG, Gaudi and Motor Parts & Equipment Corporation have bolstered GPC’s market position.
GPC’s focus on improving supply chain efficiency and customer service through strategic initiatives bodes well. Solid liquidity of $2.5 billion (at the end of the first quarter of 2024) and manageable leverage of 40% provide financial flexibility to tap growth opportunities. The company's dividend aristocrat status is commendable.
The Zacks Consensus Estimate for GPC’s 2024 sales and earnings implies year-over-year growth of 3% and 6%, respectively. The consensus mark for 2025 sales and EPS suggests an uptick of another 4% and 9%, respectively, on a year-over-year basis. GPC currently carries a Zacks Rank #3 (Hold) and has a VGM Score of A.
Price & Consensus: GPC
Dorman: The company is a key player in the motor vehicle aftermarket industry, focusing on replacement and upgrade parts. Dorman consistently expands its product line, introducing hundreds of new direct replacement parts and assemblies designed to match or improve upon the performance of original equipment. In 2023, the company reached record annual sales of $1.93 billion, marking a 13% increase year over year. First-quarter 2024 sales saw a modest growth of 0.4% year over year.
The acquisition of Super ATV has significantly boosted the company's overall prospects. Dorman's dedication to regular product launches and ongoing innovation fuels its sustained growth. With a strong balance sheet, a manageable debt-to-capitalization ratio of 29% (compared to the industry average of 55%) and ample liquidity, Dorman is well-poised 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 4% and 24%, respectively. The consensus mark for 2025 sales and EPS suggests an uptick of another 5% and 12%, respectively, on a year-over-year basis. Dorman currently carries a Zacks Rank #3 and has a VGM Score of A.
Price & Consensus: DORM
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.