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Prospects of the Zacks Automotive - Original Equipment industry look muted now amid commodity cost inflation, supply chain disruptions and risks of slowing vehicle demand. Rising operating costs amid the changing dynamics of the auto industry are also acting as speed bumps. Most auto equipment manufacturers are likely to have a tough time balancing their revenue generation, given broader challenges and escalating expenses.
The performance of the companies will largely depend on smart cost management efforts. Despite multiple odds, two industry players standing tall in an otherwise gloomy industry are Oshkosh Corporation and Holley Inc.
About the Industry
The Zacks Automotive - Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering, and suspension, as well as brakes. Demand for original equipment depends directly on the sale of vehicles, which, in turn, is heavily reliant on economic growth and consumer confidence.
Importantly, the rapidly globalizing world is opening up newer avenues for auto-equipment manufacturers who need to adapt to the changing dynamics through systematic research and development. From a future competitive standpoint, the industry players need to focus on technologies that offer the best value in a short span of time to the market.
Factors Shaping the Industry
Expectations of Slowing Auto Sales Growth: Following a robust sales rebound in 2023, the auto industry is poised for a moderate pace of growth in 2024. While the Fed projected rate cuts, the cost of vehicle financing still remains reasonably high.Additionally, with elevated vehicle prices and pent-up demand largely absorbed in 2023, industry watchers expect the sales growth rate to decelerate this year. Slowing vehicle demand growth doesn’t augur well for industry participants as their prospects are tied to auto sales.
Supply Chain Challenges Amid Red Sea Conflict: The auto equipment sector is set to face supply chain vulnerabilities due to disruptions in shipping. Heightened logistical obstacles and interruptions in the supply chain, stemming from persistent attacks by Houthi rebels in the Red Sea, may pose challenges.
Despite initial expectations of decreasing inflation in 2024, manufacturers and retailers are contending with delays and increased costs. The ongoing crisis in the Red Sea, disrupting a crucial shipping route through the Suez Canal, is anticipated to have a negative impact on the automotive industry. This crisis serves as a test of resilience for the auto supply chain, leading to a surge in transportation costs.
Cost Challenges Persist: The automotive equipment industry is facing difficulties stemming from elevated raw material and labor expenses. Despite some relief in raw material costs, they remain higher than pre-pandemic levels. The enduring effects of inflation are anticipated to persist in the near term, placing strain on the profit margins of industry players. Furthermore, the extensive global reach of most industry players makes them susceptible to potential issues linked to foreign exchange. Unfavorable currency translations are projected to affect earnings and margins.
Adjusting to Technological Progress: The automotive equipment industry is experiencing transformation, propelled by swift technological advancements and digitalization. Original equipment manufacturers (OEMs) are progressively concentrating on the creation of technologically sophisticated components to cater to the needs of electric vehicles (EVs) and autonomous vehicles (AVs). Stringent emission regulations are advocating high-quality, cost-efficient auto components, opening up possibilities for equipment providers.
Nevertheless, this technological shift presents challenges for OEMs, as it demands substantial expenditures in research and development. Effectively managing costs is essential for maintaining robust profit margins. The performance of auto equipment providers will hinge on their capability to absorb these expenses, adapt to evolving technologies and leverage revenue opportunities.
Zacks Industry Rank Indicates Subdued View
The Zacks Automotive – Original Equipment industry is placed within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #154, which places it in the bottom 37% 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 dull 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 about this group’s earnings growth potential. Over the past six months, the industry’s earnings estimates for 2024 have declined 8.1%.
Before we present a few stocks that you may invest in to cash in on the industry’s potential, it’s worth taking a look at the industry’s performance and current valuation.
Industry Lags Sector and S&P 500
Over the past year, the Zacks Original Equipment industry has underperformed the broader Auto sector and the Zacks S&P 500 composite. The industry has lost 4.9% against the sector and S&P 500’s growth of 25.6% and 22.8%, respectively.
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 the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 16.05X compared with the S&P 500’s 13.88X and the sector’s 13.51X.
Over the past five years, the industry has traded as high as 18.66X, as low as 3.92X and at a median of 9.81X.
2 Stocks to Buy Now
Oshkosh: It is a producer and seller of a varied range of vehicle bodies and specialty vehicles. Frequent business wins and a comprehensive offering of innovative new products are set to drive Oshkosh’s prospects. Record consolidated backlog of $16 billion provides enough visibility for the coming years. The acquisitions of Pratt Miller, CartSeeker Technology, JBT's AeroTech business and Hinowa have bolstered Oshkosh’s portfolio. The firm’s balance sheet strength and investor-friendly moves instill optimism.
Oshkosh currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The Zacks Consensus Estimate for 2024 top and bottom lines implies year-over-year growth of 4.3% and 7%, respectively, from the 2023 estimated figures. The consensus mark for 2023 and 2024 EPS has moved up 3 cents and 15 cents, respectively, over the past 30 days.
Holley: It is a designer, marketer and manufacturer of products for car and truck enthusiasts. The company's strategic focus on operational improvements and customer engagement bodes well. Holley is placing a strong emphasis on product development, as evidenced by the launch of 67 new products in the last reported quarter.
The adoption of a new organizational design, featuring seven distinct product category teams, reflects a strategic move to drive growth. It is likely to have achieved $35 million in savings in 2023, driven by cost savings initiatives. It is actively focused on de-leveraging its balance sheet.
Holley currently carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for 2024 top and bottom lines implies year-over-year growth of 3.3% and 44%, respectively, from the 2023 estimated figures. The company surpassed earnings estimates in three out of four trailing quarters and missed on the other, the average surprise being 130.6%.
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Oshkosh and Holley
For Immediate Release
Chicago, IL – January 19, 2024 – Today, Zacks Equity Research discusses Oshkosh Corporation (OSK - Free Report) and Holley Inc. (HLLY - Free Report) .
Industry: Auto Equipment
Link: https://www.zacks.com/commentary/2211915/2-auto-equipment-stocks-poised-to-shine-despite-industry-odds
Prospects of the Zacks Automotive - Original Equipment industry look muted now amid commodity cost inflation, supply chain disruptions and risks of slowing vehicle demand. Rising operating costs amid the changing dynamics of the auto industry are also acting as speed bumps. Most auto equipment manufacturers are likely to have a tough time balancing their revenue generation, given broader challenges and escalating expenses.
The performance of the companies will largely depend on smart cost management efforts. Despite multiple odds, two industry players standing tall in an otherwise gloomy industry are Oshkosh Corporation and Holley Inc.
About the Industry
The Zacks Automotive - Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering, and suspension, as well as brakes. Demand for original equipment depends directly on the sale of vehicles, which, in turn, is heavily reliant on economic growth and consumer confidence.
Importantly, the rapidly globalizing world is opening up newer avenues for auto-equipment manufacturers who need to adapt to the changing dynamics through systematic research and development. From a future competitive standpoint, the industry players need to focus on technologies that offer the best value in a short span of time to the market.
Factors Shaping the Industry
Expectations of Slowing Auto Sales Growth: Following a robust sales rebound in 2023, the auto industry is poised for a moderate pace of growth in 2024. While the Fed projected rate cuts, the cost of vehicle financing still remains reasonably high.Additionally, with elevated vehicle prices and pent-up demand largely absorbed in 2023, industry watchers expect the sales growth rate to decelerate this year. Slowing vehicle demand growth doesn’t augur well for industry participants as their prospects are tied to auto sales.
Supply Chain Challenges Amid Red Sea Conflict: The auto equipment sector is set to face supply chain vulnerabilities due to disruptions in shipping. Heightened logistical obstacles and interruptions in the supply chain, stemming from persistent attacks by Houthi rebels in the Red Sea, may pose challenges.
Despite initial expectations of decreasing inflation in 2024, manufacturers and retailers are contending with delays and increased costs. The ongoing crisis in the Red Sea, disrupting a crucial shipping route through the Suez Canal, is anticipated to have a negative impact on the automotive industry. This crisis serves as a test of resilience for the auto supply chain, leading to a surge in transportation costs.
Cost Challenges Persist: The automotive equipment industry is facing difficulties stemming from elevated raw material and labor expenses. Despite some relief in raw material costs, they remain higher than pre-pandemic levels. The enduring effects of inflation are anticipated to persist in the near term, placing strain on the profit margins of industry players. Furthermore, the extensive global reach of most industry players makes them susceptible to potential issues linked to foreign exchange. Unfavorable currency translations are projected to affect earnings and margins.
Adjusting to Technological Progress: The automotive equipment industry is experiencing transformation, propelled by swift technological advancements and digitalization. Original equipment manufacturers (OEMs) are progressively concentrating on the creation of technologically sophisticated components to cater to the needs of electric vehicles (EVs) and autonomous vehicles (AVs). Stringent emission regulations are advocating high-quality, cost-efficient auto components, opening up possibilities for equipment providers.
Nevertheless, this technological shift presents challenges for OEMs, as it demands substantial expenditures in research and development. Effectively managing costs is essential for maintaining robust profit margins. The performance of auto equipment providers will hinge on their capability to absorb these expenses, adapt to evolving technologies and leverage revenue opportunities.
Zacks Industry Rank Indicates Subdued View
The Zacks Automotive – Original Equipment industry is placed within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #154, which places it in the bottom 37% 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 dull 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 about this group’s earnings growth potential. Over the past six months, the industry’s earnings estimates for 2024 have declined 8.1%.
Before we present a few stocks that you may invest in to cash in on the industry’s potential, it’s worth taking a look at the industry’s performance and current valuation.
Industry Lags Sector and S&P 500
Over the past year, the Zacks Original Equipment industry has underperformed the broader Auto sector and the Zacks S&P 500 composite. The industry has lost 4.9% against the sector and S&P 500’s growth of 25.6% and 22.8%, respectively.
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 the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 16.05X compared with the S&P 500’s 13.88X and the sector’s 13.51X.
Over the past five years, the industry has traded as high as 18.66X, as low as 3.92X and at a median of 9.81X.
2 Stocks to Buy Now
Oshkosh: It is a producer and seller of a varied range of vehicle bodies and specialty vehicles. Frequent business wins and a comprehensive offering of innovative new products are set to drive Oshkosh’s prospects. Record consolidated backlog of $16 billion provides enough visibility for the coming years. The acquisitions of Pratt Miller, CartSeeker Technology, JBT's AeroTech business and Hinowa have bolstered Oshkosh’s portfolio. The firm’s balance sheet strength and investor-friendly moves instill optimism.
Oshkosh currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The Zacks Consensus Estimate for 2024 top and bottom lines implies year-over-year growth of 4.3% and 7%, respectively, from the 2023 estimated figures. The consensus mark for 2023 and 2024 EPS has moved up 3 cents and 15 cents, respectively, over the past 30 days.
Holley: It is a designer, marketer and manufacturer of products for car and truck enthusiasts. The company's strategic focus on operational improvements and customer engagement bodes well. Holley is placing a strong emphasis on product development, as evidenced by the launch of 67 new products in the last reported quarter.
The adoption of a new organizational design, featuring seven distinct product category teams, reflects a strategic move to drive growth. It is likely to have achieved $35 million in savings in 2023, driven by cost savings initiatives. It is actively focused on de-leveraging its balance sheet.
Holley currently carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for 2024 top and bottom lines implies year-over-year growth of 3.3% and 44%, respectively, from the 2023 estimated figures. The company surpassed earnings estimates in three out of four trailing quarters and missed on the other, the average surprise being 130.6%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.