The Zacks Automotive-Retail and Wholesale-Parts sector is thriving on the back of sustained vehicle demand and the rising age of vehicles. Also, the advent of technologically advanced sophisticated vehicles has spurred consumer reliance on professional assistance, opening up new opportunities for industry players. Auto parts retailers need to develop comprehensive strategies to leverage these opportunities. Given the dynamic market conditions, adept cost management is crucial. Industry participants worth adding to your watchlist include O’Reilly Automotive ORLY and AutoZone AZO.

Industry Overview

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. 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.

Factors at Play

Vehicle Sales Growth to Aid Parts Market: New vehicle sales in the United States surged to their highest levels in 2023 since 2019, propelled by pent-up demand, bolstered inventories, attractive incentives and increased fleet sales. While the growth rate is expected to moderate, as much of the pent-up demand was satisfied in 2023, sales are still projected to see year-over-year growth. Edmunds forecasts U.S. auto sales to reach 15.7 million vehicles in 2024, indicating a 1.3% increase annually. Anticipated rate cuts by the Fed throughout the year are expected to lower the cost of vehicle financing, which might also help in fueling sales volumes. With the uptick in vehicle sales, demand for auto retail and wholesale parts is also expected to rise, providing a boost to industry participants.

Vehicle Longevity to Buoy Parts Demand: The average age of cars and light trucks in the United States reached 12.5 years last year, marking the sixth consecutive year of increase. The accelerated growth in the average age of light vehicles brings benefits to the automotive wholesale and retail parts industry. A fleet of older vehicles calls for the 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. Consequently, there has been a noticeable surge in the demand for automotive parts.

Technology Progress Creating Fresh Avenues:  The industry is experiencing a transformation due to shifting customer demands and revolutionary technological advancements. The rise of sophisticated and advanced vehicles has led consumers to seek professional assistance instead of relying on do-it-yourself methods. The extensive adoption of technology and swift digitization are causing a fundamental reorganization of the automotive market. The implementation of omnichannel marketing and accelerated digitization are driving sales growth.

Zacks Industry Rank Depicts Promising Outlook

The Zacks Auto Retail & Wholesale Parts industry is within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #52, which places it in the top 21% 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 encouraging 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 about this group’s earnings growth potential. Since January, the industry’s earnings estimates for 2024 have inched up 0.5%.

Before we present a few stocks that should be on your watchlist, let’s take a look at the industry’s shareholder returns and current valuation first.

Industry Tops Sector, Lags S&P 500

The Zacks Auto Retail and Wholesale Parts industry has outperformed the Auto, Tires and Truck sector but underperformed the Zacks S&P 500 composite over the past year. The industry has gained 21.9% over this period compared with the S&P 500 and the sector’s growth of 30.3% and 5.6%, respectively.

One-Year Price Performance

Industry’s Current Valuation

Since automotive companies are debt-laden, it makes sense to value them based on the Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) ratio.

Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 64.94X compared with the S&P 500’s 14.84X and the sector’s 13.86X.

Over the past five years, the industry has traded as high as 67.51X and as low as 15.90X, with the median being 24.85X, as the chart below shows.

EV/EBITDA Ratio (Past 5 Years)

 

3 Stocks Worth a Look

O’Reilly: It is one of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The company has been generating record revenues for 31 consecutive years due to growth in the auto parts market. ORLY is poised to benefit from store openings and distribution centers in profitable regions.  The company expects both DIY and professional businesses to contribute to comps growth in 2024, with the professional business expected to outperform. The firm’s robust buyback program boosts investors’ confidence.In 2023, O’Reilly repurchased 3.6 million shares for $3.2 billion. As of Feb 7, 2024, the company had nearly $2.47 billion remaining under the current share repurchase authorization.

O’Reilly, which currently carries a Zacks Rank #3 (Hold), has a long-term expected EPS growth rate of around 13.08%. The Zacks Consensus Estimate for its 2024 earnings and sales indicates a year-over-year uptick of 9.6% and 7.2%, respectively. The consensus mark for 2025 sales and earnings per share implies year-over-year growth of 5.3% and 10.4%, respectively. ORLY pulled off an earnings beat in each of the last four quarters, the average surprise being 2.69%.

Price & Consensus: ORLY

AutoZone: It is one of the leading specialty retailers and distributors of automotive replacement parts and accessories in the United States. It has been generating record revenues for 34 straight years. The company’s high-quality products, store-expansion initiatives and omni-channel efforts to improve customer shopping experience are boosting its market share. AutoZone’s robust buyback program also sparks confidence. In the fiscal second quarter of 2024 (ended Feb 10, 2024), the firm repurchased shares worth $224 million. At the end of the quarter, AZO had over $2.1 billion remaining under share repurchase authorization.

AutoZone, which currently carries a Zacks Rank #3, has a long-term expected EPS growth rate of 13.24%. The Zacks Consensus Estimate for fiscal 2024 earnings and sales indicates a year-over-year uptick of 14% and 6.5%, respectively. The consensus mark for fiscal 2025 sales and earnings per share implies year-over-year growth of 10.3% and 3.2%, respectively. AZO’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 7.7%.

Price & Consensus: AZO

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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