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These 2 Auto Replacement Parts Stocks Are Worth Watching Now
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Aging vehicles are a key driver of growth for the Zacks Automotive Replacement Parts industry, as consumers invest in replacing faulty components to keep their older cars running smoothly. The rise of technologically advanced vehicles also unlocks new opportunities for the sector. However, challenges such as commodity cost inflation, currency fluctuations and supply chain issues remain. Despite these concerns, the industry's outlook is promising, with attractive valuations compared to both the broader sector and the S&P 500. Companies like Dorman Products (DORM - Free Report) and Standard Motor Products (SMP - Free Report) are well-positioned, benefiting from strategic acquisitions and shareholder-friendly initiatives.
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 can avail professional services for the same. The industry is undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
Key Investing Themes
Aging Vehicles Drive Market Demand: The average age of U.S. vehicles rose to a record 12.6 years in 2024, continuing a seven-year upward trend. As vehicles age, they require more frequent maintenance and repairs, which supports the automotive replacement parts industry, boosting demand for parts and services. The aging fleet has become a key growth driver, as older cars necessitate ongoing investments to maintain safety and functionality, benefiting companies in the replacement sector.
Technological Advancements Create New Growth Paths: The automotive industry's rapid digitization and shift toward electric and autonomous vehicles is reshaping the market, offering fresh opportunities for the auto parts sector. As cars become more technologically advanced, replacement needs have expanded to include complex components like electronic systems, sensors, and software-driven parts. This shift allows industry players to tap into new revenue streams by producing high-tech, innovative replacements, as modern vehicles increasingly rely on sophisticated systems that will eventually require updates or replacements.
Profit Challenges Amid Rising Costs: Increasing complexity in automotive components might put pressure on profit margins within the auto replacement parts industry. High commodity costs and supply chain disruptions could further aggravate the situation, impacting profitability. Additionally, global players face foreign exchange volatility, which can erode earnings. All these factors could squeeze margins despite rising demand. These cost pressures and operational difficulties create significant headwinds that may curb the sector's potential growth moving forward.
Favorable Zacks Industry Rank
The Zacks Automotive – Replacements Parts industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #65, which places it in the top 26% 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 solid 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic in this group’s earnings growth potential. Since August, the industry’s earnings estimates for 2024 have moved 2% north.
Before we present a couple of stocks from the industry worth considering for your portfolio, 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 both the Auto, Tires and Truck sector and S&P 500 composite over the past year. The industry has declined 21%, wider than the sector’s decline of 8.6%. Meanwhile, the S&P 500 has risen 32.3% over the same 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 6.79X compared with the S&P 500’s 19.2X and the sector’s trailing-12-month EV/EBITDA of 15.86X. Over the past five years, the industry has traded as high as 12X, as low as 6.76X and at a median of 9X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Keep an Eye On
Dorman: The company is a key player in the motor vehicle aftermarket industry, focusing on replacement and upgrade parts. Dorman consistently broadens its product offerings, adding hundreds of new direct replacement parts and assemblies designed to meet or exceed original equipment performance. In 2023, Dorman achieved record annual sales of $1.93 billion, a 13% year-over-year increase. Sales in the first half of 2024 grew 3%. Buoyed by strong first-half results, the company has lifted its full-year EPS view.
The acquisition of Super ATV has bolstered the company's overall prospects, supported by a strong balance sheet, a debt-to-capitalization ratio of 31% (compared to the industry average of 40%) and ample liquidity. 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 35.5%, respectively. The consensus mark for 2025 sales and EPS suggests an uptick of another 4% and 8.4%, respectively, on a year-over-year basis. Dorman currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A.
Standard Motors: It is one of the leading manufacturers and distributors of premium automotive replacement parts for engine management and temperature control systems. SMP has successfully initiated the first phase of shipments from its new distribution center and is optimistic about the anticipated benefits upon full implementation. This expansion will offer SMP increased capacity to support future growth, reduce risk and enhance product delivery times.
The impending acquisition of Nissens, expected to close by the end of 2024, will help SMP expand its geographic presence and establish a significant global growth platform. Standard Motor’s long-term debt-to-capital ratio of 0.24 is lower than the industry’s 0.35, giving it enough financial flexibility to tap into growth opportunities. The company repurchased $10.4 million of shares in the first half of 2024. It increased dividends three times in the last five years, with an annualized growth of 5.38%.
The Zacks Consensus Estimate for SMP’s 2024 sales and earnings implies year-over-year growth of 4% and 3%, respectively. The consensus mark for 2025 sales and EPS suggests an uptick of another 2% and 14%, respectively, on a year-over-year basis. Standard Motors currently carries a Zacks Rank #3 (Hold) and has a VGM Score of A.
Price & Consensus: SMP
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These 2 Auto Replacement Parts Stocks Are Worth Watching Now
Aging vehicles are a key driver of growth for the Zacks Automotive Replacement Parts industry, as consumers invest in replacing faulty components to keep their older cars running smoothly. The rise of technologically advanced vehicles also unlocks new opportunities for the sector. However, challenges such as commodity cost inflation, currency fluctuations and supply chain issues remain. Despite these concerns, the industry's outlook is promising, with attractive valuations compared to both the broader sector and the S&P 500. Companies like Dorman Products (DORM - Free Report) and Standard Motor Products (SMP - Free Report) are well-positioned, benefiting from strategic acquisitions and shareholder-friendly initiatives.
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 can avail professional services for the same. The industry is undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.
Key Investing Themes
Aging Vehicles Drive Market Demand: The average age of U.S. vehicles rose to a record 12.6 years in 2024, continuing a seven-year upward trend. As vehicles age, they require more frequent maintenance and repairs, which supports the automotive replacement parts industry, boosting demand for parts and services. The aging fleet has become a key growth driver, as older cars necessitate ongoing investments to maintain safety and functionality, benefiting companies in the replacement sector.
Technological Advancements Create New Growth Paths: The automotive industry's rapid digitization and shift toward electric and autonomous vehicles is reshaping the market, offering fresh opportunities for the auto parts sector. As cars become more technologically advanced, replacement needs have expanded to include complex components like electronic systems, sensors, and software-driven parts. This shift allows industry players to tap into new revenue streams by producing high-tech, innovative replacements, as modern vehicles increasingly rely on sophisticated systems that will eventually require updates or replacements.
Profit Challenges Amid Rising Costs: Increasing complexity in automotive components might put pressure on profit margins within the auto replacement parts industry. High commodity costs and supply chain disruptions could further aggravate the situation, impacting profitability. Additionally, global players face foreign exchange volatility, which can erode earnings. All these factors could squeeze margins despite rising demand. These cost pressures and operational difficulties create significant headwinds that may curb the sector's potential growth moving forward.
Favorable Zacks Industry Rank
The Zacks Automotive – Replacements Parts industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #65, which places it in the top 26% 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 solid 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic in this group’s earnings growth potential. Since August, the industry’s earnings estimates for 2024 have moved 2% north.
Before we present a couple of stocks from the industry worth considering for your portfolio, 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 both the Auto, Tires and Truck sector and S&P 500 composite over the past year. The industry has declined 21%, wider than the sector’s decline of 8.6%. Meanwhile, the S&P 500 has risen 32.3% over the same 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 6.79X compared with the S&P 500’s 19.2X and the sector’s trailing-12-month EV/EBITDA of 15.86X. Over the past five years, the industry has traded as high as 12X, as low as 6.76X and at a median of 9X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Keep an Eye On
Dorman: The company is a key player in the motor vehicle aftermarket industry, focusing on replacement and upgrade parts. Dorman consistently broadens its product offerings, adding hundreds of new direct replacement parts and assemblies designed to meet or exceed original equipment performance. In 2023, Dorman achieved record annual sales of $1.93 billion, a 13% year-over-year increase. Sales in the first half of 2024 grew 3%. Buoyed by strong first-half results, the company has lifted its full-year EPS view.
The acquisition of Super ATV has bolstered the company's overall prospects, supported by a strong balance sheet, a debt-to-capitalization ratio of 31% (compared to the industry average of 40%) and ample liquidity. 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 35.5%, respectively. The consensus mark for 2025 sales and EPS suggests an uptick of another 4% and 8.4%, respectively, on a year-over-year basis. Dorman currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: DORM
Standard Motors: It is one of the leading manufacturers and distributors of premium automotive replacement parts for engine management and temperature control systems. SMP has successfully initiated the first phase of shipments from its new distribution center and is optimistic about the anticipated benefits upon full implementation. This expansion will offer SMP increased capacity to support future growth, reduce risk and enhance product delivery times.
The impending acquisition of Nissens, expected to close by the end of 2024, will help SMP expand its geographic presence and establish a significant global growth platform. Standard Motor’s long-term debt-to-capital ratio of 0.24 is lower than the industry’s 0.35, giving it enough financial flexibility to tap into growth opportunities. The company repurchased $10.4 million of shares in the first half of 2024. It increased dividends three times in the last five years, with an annualized growth of 5.38%.
The Zacks Consensus Estimate for SMP’s 2024 sales and earnings implies year-over-year growth of 4% and 3%, respectively. The consensus mark for 2025 sales and EPS suggests an uptick of another 2% and 14%, respectively, on a year-over-year basis. Standard Motors currently carries a Zacks Rank #3 (Hold) and has a VGM Score of A.
Price & Consensus: SMP