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2 Large Cap Auto Retail Parts Stocks That Hold Potential
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The near-term outlook of Zacks Automotive - Retail and Wholesale - Parts industry is being influenced by various factors. The aging vehicle fleet is leading to increased demand for replacement parts as consumers. Also, vehicle sales have remained resilient, benefiting industry participants, with expectations of growth as financing costs will potentially decline as the Fed is set to cut rates soon. However, the industry is navigating challenges, including the shift away from DIY repairs due to the complexity of modern vehicles and the need for significant capital expenditures to keep pace with technological advancements and digitization. O’Reilly Automotive (ORLY - Free Report) and AutoZone (AZO - Free Report) are two industry players poised to navigate this dynamic industry environment better.
Industry Overview
The Zacks Automotive - Retail and Wholesale - Parts industry players execute several functions. These include retailing, distribution and installation of vehicle parts, equipment and accessories. Vehicle parts and accessories include seat covers, antifreeze, engine additives, wiper blades, batteries, brake system components, belts, chassis parts, driveline parts, engine parts and fuel pumps. Consumers have two options. They can either 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 highly competitive and undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
What's Shaping the Industry's Prospects?
Aging Vehicles Drive Parts Demand: The average age of vehicles in the United States hit 12.6 years in 2024, marking the seventh consecutive year of increase. This trend has been a catalyst for the auto retail parts industry, as older vehicles require more maintenance and replacement parts. As consumers invest in keeping their aging vehicles operational, demand for automotive parts has surged, bolstering industry growth.
Resilient Vehicle Sales Support Industry: Despite high interest rates, U.S. vehicle sales saw a modest 1% increase in the first half of 2024, with full-year sales projected to reach 12.8 million. As inflation cools and the Federal Reserve potentially lowers rates, financing costs could drop, further boosting vehicle demand. This would positively impact the auto retail parts industry, as more vehicles on the road translate to higher demand for parts and services.
Technological Shifts Challenge DIY Market: Technological advancements in vehicles are reshaping consumer behavior in the auto parts industry. With cars becoming more sophisticated, fewer consumers are engaging in DIY repairs, instead opting for professional services. This shift is pressuring the DIY segment, potentially reducing its market share within the broader auto retail parts industry.
High Capex Requirements Strain Resources: The auto retail parts industry faces significant capital expenditure pressures due to the rapid adoption of technology and digitization. While these advancements, including electric and driverless vehicles, offer growth opportunities, they also require substantial investment. Additionally, increased spending on store openings, distribution centers and omnichannel marketing is straining resources, potentially affecting profitability.
Zacks Industry Rank Paints a Glum Picture
The Zacks Auto Retail & Wholesale Parts industry is within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #196, which places it in the bottom 22% 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 tepid 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 getting optimistic about this group’s earnings growth potential. Over the past month, the industry’s earnings estimates for 2023 have declined 12%.
Before we present a few stocks that could still be on your watchlist, let’s take a look at the industry’s shareholder returns and current valuation first.
Industry Lags S&P 500 But Tops Sector
The Zacks Auto Retail and Wholesale Parts industry has outperformed the Auto, Tires and Truck sector and underperformed the Zacks S&P 500 composite over the past year. The industry has soared 9.8% over this period compared with the S&P 500 growth of 24.8%. Meanwhile, the sector has declined 11.1%.
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.
Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 49.19X compared with the S&P 500’s 18.97X and the sector’s 15.6X.
Over the past five years, the industry has traded as high as 50.76X and as low as 14.03X, with the median being 23.91X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
2 Stocks to Keep an Eye On
O’Reilly: It is one of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The company (market cap of roughly $65 billion) has been generating record revenues for 31 consecutive years due to growth in the auto parts market and store expansion efforts. For 2024, O’Reilly projects total revenues in the $16.6-$16.9 billion band, up from $15.8 billion in 2023. With its second international expansion, O'Reilly forayed into Canada by acquiring Groupe Del Vasto — a transaction that closed in January 2024. ORLY is poised to benefit from store openings and distribution centers in profitable regions. The company’s dual-market strategy and strong distribution network bode well. Strong cash flow generation supports the firm’s robust buyback program, boosting investors’ confidence.
O’Reilly currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2024 earnings per share (EPS) and sales indicates a year-over-year uptick of 7% and 6%, respectively. The consensus mark for 2025 EPS and sales suggests growth of 5.5% and 11.3% from 2024 projected levels, respectively. ORLY pulled off an earnings beat in three of the last four quarters and missed once, the average surprise being 0.53%.
AutoZone: It is one of the leading specialty retailers and distributors of automotive replacement parts and accessories in the United States. The company (market cap of roughly $54 billion) has been generating record revenues for 34 straight 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. Expanded hub and mega-hub rollouts, along with the expansion of the distribution center footprint, bode well. With continued dedication to Mexico and Brazil, AZO is set to ramp up store openings in these markets, aiming for as many as 200 annually by 2028. The ramp-up of e-commerce efforts is driving traffic to the company’s website, helping the company to deliver growth. AutoZone’s solid share repurchase program also sparks optimism.
AutoZone currently carries a Zacks Rank #3. The Zacks Consensus Estimate for its fiscal 2024 earnings and sales indicates a year-over-year uptick of 14.4% and 6%, respectively. The consensus mark for fiscal 2025 EPS and revenues suggests year-over-year growth of 8% and 3%, respectively. AZO pulled off earnings beat in the last four quarters, the average surprise being 5.7%.
Price & Consensus: AZO
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2 Large Cap Auto Retail Parts Stocks That Hold Potential
The near-term outlook of Zacks Automotive - Retail and Wholesale - Parts industry is being influenced by various factors. The aging vehicle fleet is leading to increased demand for replacement parts as consumers. Also, vehicle sales have remained resilient, benefiting industry participants, with expectations of growth as financing costs will potentially decline as the Fed is set to cut rates soon. However, the industry is navigating challenges, including the shift away from DIY repairs due to the complexity of modern vehicles and the need for significant capital expenditures to keep pace with technological advancements and digitization. O’Reilly Automotive (ORLY - Free Report) and AutoZone (AZO - Free Report) are two industry players poised to navigate this dynamic industry environment better.
Industry Overview
The Zacks Automotive - Retail and Wholesale - Parts industry players execute several functions. These include retailing, distribution and installation of vehicle parts, equipment and accessories. Vehicle parts and accessories include seat covers, antifreeze, engine additives, wiper blades, batteries, brake system components, belts, chassis parts, driveline parts, engine parts and fuel pumps. Consumers have two options. They can either 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 highly competitive and undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
What's Shaping the Industry's Prospects?
Aging Vehicles Drive Parts Demand: The average age of vehicles in the United States hit 12.6 years in 2024, marking the seventh consecutive year of increase. This trend has been a catalyst for the auto retail parts industry, as older vehicles require more maintenance and replacement parts. As consumers invest in keeping their aging vehicles operational, demand for automotive parts has surged, bolstering industry growth.
Resilient Vehicle Sales Support Industry: Despite high interest rates, U.S. vehicle sales saw a modest 1% increase in the first half of 2024, with full-year sales projected to reach 12.8 million. As inflation cools and the Federal Reserve potentially lowers rates, financing costs could drop, further boosting vehicle demand. This would positively impact the auto retail parts industry, as more vehicles on the road translate to higher demand for parts and services.
Technological Shifts Challenge DIY Market: Technological advancements in vehicles are reshaping consumer behavior in the auto parts industry. With cars becoming more sophisticated, fewer consumers are engaging in DIY repairs, instead opting for professional services. This shift is pressuring the DIY segment, potentially reducing its market share within the broader auto retail parts industry.
High Capex Requirements Strain Resources: The auto retail parts industry faces significant capital expenditure pressures due to the rapid adoption of technology and digitization. While these advancements, including electric and driverless vehicles, offer growth opportunities, they also require substantial investment. Additionally, increased spending on store openings, distribution centers and omnichannel marketing is straining resources, potentially affecting profitability.
Zacks Industry Rank Paints a Glum Picture
The Zacks Auto Retail & Wholesale Parts industry is within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #196, which places it in the bottom 22% 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 tepid 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 getting optimistic about this group’s earnings growth potential. Over the past month, the industry’s earnings estimates for 2023 have declined 12%.
Before we present a few stocks that could still be on your watchlist, let’s take a look at the industry’s shareholder returns and current valuation first.
Industry Lags S&P 500 But Tops Sector
The Zacks Auto Retail and Wholesale Parts industry has outperformed the Auto, Tires and Truck sector and underperformed the Zacks S&P 500 composite over the past year. The industry has soared 9.8% over this period compared with the S&P 500 growth of 24.8%. Meanwhile, the sector has declined 11.1%.
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.
Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 49.19X compared with the S&P 500’s 18.97X and the sector’s 15.6X.
Over the past five years, the industry has traded as high as 50.76X and as low as 14.03X, with the median being 23.91X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
2 Stocks to Keep an Eye On
O’Reilly: It is one of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The company (market cap of roughly $65 billion) has been generating record revenues for 31 consecutive years due to growth in the auto parts market and store expansion efforts. For 2024, O’Reilly projects total revenues in the $16.6-$16.9 billion band, up from $15.8 billion in 2023. With its second international expansion, O'Reilly forayed into Canada by acquiring Groupe Del Vasto — a transaction that closed in January 2024. ORLY is poised to benefit from store openings and distribution centers in profitable regions. The company’s dual-market strategy and strong distribution network bode well. Strong cash flow generation supports the firm’s robust buyback program, boosting investors’ confidence.
O’Reilly currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2024 earnings per share (EPS) and sales indicates a year-over-year uptick of 7% and 6%, respectively. The consensus mark for 2025 EPS and sales suggests growth of 5.5% and 11.3% from 2024 projected levels, respectively. ORLY pulled off an earnings beat in three of the last four quarters and missed once, the average surprise being 0.53%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: ORLY
AutoZone: It is one of the leading specialty retailers and distributors of automotive replacement parts and accessories in the United States. The company (market cap of roughly $54 billion) has been generating record revenues for 34 straight 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. Expanded hub and mega-hub rollouts, along with the expansion of the distribution center footprint, bode well. With continued dedication to Mexico and Brazil, AZO is set to ramp up store openings in these markets, aiming for as many as 200 annually by 2028. The ramp-up of e-commerce efforts is driving traffic to the company’s website, helping the company to deliver growth. AutoZone’s solid share repurchase program also sparks optimism.
AutoZone currently carries a Zacks Rank #3. The Zacks Consensus Estimate for its fiscal 2024 earnings and sales indicates a year-over-year uptick of 14.4% and 6%, respectively. The consensus mark for fiscal 2025 EPS and revenues suggests year-over-year growth of 8% and 3%, respectively. AZO pulled off earnings beat in the last four quarters, the average surprise being 5.7%.
Price & Consensus: AZO