The Zacks Automotive - Retail And Wholesale - Parts industry players execute several functions. These include manufacturing, retailing, distribution, and installation of vehicle parts, equipment and accessories. Consumers have two options – either they can opt for repairing their vehicles on their own (the ‘do-it-yourself’ or ‘DIY’ segment) or they can take the assistance of a professional repair facility (the ‘do-it-for me’ or ‘DIFM’ segment).
Important companies belonging to this industry include Advance Auto Parts (AAP - Free Report) , CarMax (KMX - Free Report) , AutoZone (AZO - Free Report) and O’Reilly Automotive (ORLY - Free Report) .
Let’s take a look at the industry’s three major themes:
- The Auto Retail & Wholesales Parts industry, being consumer cyclical, looks favorable at the moment. The industry, which is heavily dependent on business cycle and economic conditions, is benefiting from growing consumer disposable income, which is aiding the demand for products and services. Notably, real consumer spending rose 0.4% in July, after increasing 0.2% in June. It is anticipated that industry revenues will reflect this trend and grow further. Further, employment data for the month of August indicates robust wage growth and job additions along with low unemployment rates, signaling optimism about the U.S. economy, which will aid growth of the industry. However, the US-Sino trade tiff has spooked financial markets and resulted in an inversion of the yield curve, which may put a brake on economic expansion in the near future.
- The Auto Retail & Wholesales Parts industry is undergoing radical change with evolving customer expectations and technological innovation acting as game changers. Increase in the number of new, complicated and high-tech vehicles has compelled consumers to opt for more professional assistance instead of opting for DIY. Widespread usage of technology and rapid digitalization are resulting in fundamental restructuring of the automotive market and the automotive retail and wholesale parts industry needs to develop a detailed roadmap to make the most out of the opportunities in a changing market scenario.
- A shift toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. While the shift may create new opportunities for the industry in the form of more supplicated products and services, there may be some temporary issues that need to be addressed to stay ahead of the game. Considering the changing dynamics, there has been a radical change in the business models of auto companies, which will impact automotive retail and wholesale parts industry.
Zacks Industry Rank Indicates Healthy Prospects
The Zacks Auto Retail & Wholesale Parts industry is a five-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #105, which places it in the top 41% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 positive earnings outlook for the constituent companies in aggregate.
Before we present a few Auto Retail & Wholesale Parts stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Auto Retail & Wholesale Parts industry has outperformed the Auto, Tires and Truck sector as well as the Zacks S&P 500 composite over the past year.
The industry has moved up 17.2% over this period compared with the S&P 500’s rise of 2.4%. In contrast, the broader sector has declined 10.2%.
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. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 22.83X compared with the S&P 500’s 11.10X and the sector’s trailing-12-month EV/EBITDA of 9.48X.
Over the past five years, the industry has traded as high as 23.23X, as low as 15.23X and at a median of 20.23X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
A robust economy and conducive labor market conditions are favorable factors for the industry. While the economy is on track now with increasing consumer disposable income, wage growth and healthy employment levels, the risk to economic expansion is mounting because of the rising tariff war between the United States and China.
Regular model launches and shifting consumers’ preference have increased demand for more sophisticated auto parts. Higher demand has brightened revenue growth prospects of the industry.
The tech-savvy millennial generation is the chief driver of sustainable and convenient mobility solutions. Auto companies have to rethink their business model and focus their attention on the user. The fast and widespread reorganization of the automotive sector is likely to have far-reaching impacts on the industry.
We are presenting one stock with a Zacks Rank #2 (Buy) that is well positioned to grow. There are also a few stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.
U.S. Auto Parts Network, Inc. (PRTS - Free Report) :
California-based U.S. Auto Parts Network is one of the leading online providers of automotive aftermarket parts, including body parts, engine parts, performance parts and accessories. The company holds a Zacks Rank #2 and has an expected earnings growth rate of 71.43% for 2020.
Price and Consensus: PTRS
AutoZone is one of the nation’s leading specialty retailers and distributor of automotive replacement parts and accessories in the United States. The Zacks Rank #3 firm expects its earnings to grow 24.18% year over year in 2019.
Price and Consensus: AZO
O'Reilly is one of the leading specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The Zacks Rank #3 firm expects its earnings to grow 8.94% year over year in 2019.
Price and Consensus: ORLY
Advance Auto Parts
Advance Auto Parts operates in the U.S. automotive aftermarket industry and is primarily engaged in selling replacement parts (excluding tires), accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles, light and heavy-duty trucks. The Zacks Rank #3 company has an expected earnings growth of 11.92% for 2019.
Price and Consensus: AAP