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2 Stocks in Focus as Auto Retail Parts Industry Stays Resilient – April 10, 2023

Strong pent-up vehicle demand amid improving inventory levels is supporting the prospects of the Zacks Automotive- Retail and Wholesale- Parts industry. The introduction of more complex and high-tech vehicles has led consumers to take more professional help, thereby opening up new opportunities for the industry participants. The auto retail parts industry needs to chalk out a detailed roadmap to make the most of the opportunities amid the changing market scenario. Industry players like O’Reilly Automotive (ORLY Free Report) and AutoZone (AZO Free Report) are worth adding to your watchlist now.

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.

Key Themes Shaping the Industry

Vehicle Demand Aiding Parts Sales: A recession may be on the horizon but one can’t see the signs of it in the vehicle market just yet. Most auto biggies reported year-over-year retail delivery growth for the first quarter of 2023 amid pent-up demand on improving inventory levels. Fleet sales also witnessed a year-over-year uptick. Per Cox Automotive, US auto sales are likely to have grown around 6% year over year in the first quarter of 2023. Amid rising vehicle sales, demand for auto retail and wholesale parts has also been on the rise, aiding industry participants.

Tech Advancement Creating Opportunities: The industry is undergoing a radical change with evolving customer expectations and technological innovation acting as game changers. An 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 (“Do It Yourself”). Widespread usage of technology and rapid digitization is resulting in a fundamental restructuring of the automotive market. Omnichannel marketing and digitization ramp-up are boosting sales.

Cost Woes Replay a Challenge: Rising commodity and labor costs, and logistical challenges are acting as headwinds. High raw materials costs like resin, steel, copper and aluminum have increased the overall manufacturing costs of the companies and are adversely impacting gross margins. At the same time, capex requirements and R&D costs are on the rise owing to the development of superior technological platforms and sophisticated tools.

Zacks Industry Rank Depicts Promising Scenario

The Zacks Auto Retail & Wholesale Parts industry is a five-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #66, 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 bright 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.

We will present a few stocks that are worth considering now. But before that, let’s take a look at the industry’s shareholder returns and current valuation first.

Industry Top Sector and S&P 500

The Zacks Auto Retail and Wholesale Parts industry has outperformed the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has lost 2% over this period compared with the S&P 500 and the sector’s decline of 7.5% and 38.4%, respectively.

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 57.72X compared with the S&P 500’s 12.55X and the sector’s 8.92X.

Over the past five years, the industry has traded as high as 60.64X and as low as 15.87X, with the median being at 23.46X, as the chart below shows.

EV/EBITDA Ratio (Past 5 Years)

These Stocks Are Worth Your Attention

AutoZone: AutoZone 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 24 straight years and the trend is expected to continue. The company’s high-quality products, store-expansion initiatives and omni-channel efforts to improve the customer shopping experience are boosting its market share. AutoZone’s robust buyback program also sparks confidence. In fiscal 2022, the firm repurchased $4.4 billion of stock.

AutoZone, which currently carries a Zacks Rank #2 (Buy), has a long-term expected EPS growth rate of 11.4%. The Zacks Consensus Estimate for fiscal 2023 earnings and sales indicates a year-over-year uptick of 9% and 7%, respectively. The consensus mark for fiscal 2024 sales and earnings per share implies year-over-year growth of 5% and 12.2%, respectively. AZO’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 10.6%.

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

Price & Consensus: AZO

O’Reilly: O’Reilly 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 30 consecutive years due to growth in the auto parts market. ORLY is poised to benefit from store openings and distribution centers in profitable regions. It targets to open 180-190 new stores in 2023. Strong cash flow generation supports the firm’s robust buyback program, thereby boosting investors’ confidence. In 2022, the firm repurchased 5 million shares for $3.28 billion.

O’Reilly, which currently carries a Zacks Rank #3 (Hold), has a long-term expected EPS growth rate of around 13%. The Zacks Consensus Estimate for its 2023 earnings and sales indicates a year-over-year uptick of 9.5% and 6.6%, respectively. The consensus mark for 2024 sales and earnings per share implies year-over-year growth of 5.4% and 11%, respectively. ORLY pulled off earnings beat twice in the last four quarters for as many misses, the average surprise being 2.8%.

Price & Consensus: ORLY

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