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 three major industry themes:
- The Auto Retail andWholesale Parts industry, being consumer cyclical, looks favorable at the moment. The industry, which is heavily dependent on business cycle and economic conditions, benefits from growing consumer disposable income that aids demand for products and services.Consumer spendingin the United States remains healthy, led by record low unemployment rate, wage growth and job additions.The recently signed phase-one trade deal between the United States and China has significantly cooled down the nearly two-year old tariff war. Although a complete deal is not likely to be signed before the U.S. presidential election this November, the interim deal will help in boosting expansion. What’s more, the Fed is expected to keep its monetary policy on hold after trimming rates three consecutive times last year to stimulate the economy.These positive economic indicators in the United States bode well for the Auto Retail and Wholesale Parts industry.
- 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 digitization are resulting in fundamental restructuring of the automotive market. 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 #114, which places it in the top 45% 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 and 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 26.3% over this period compared with the S&P 500 and sector’s rise of 23.8% and 9.9%, respectively.
One-Year Price Performance
Industry’s Current Valuation
Since automotive companies are debt-laden, it makes sense to value them based on theEV/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 23.22X compared with the S&P 500’s 12.38X and the sector’s trailing-12-month EV/EBITDA of 8.73X.
Over the past five years, the industry has traded as high as 23.85X, as low as 15.23X and at a median of 20.39X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Growing demand for complex-technology embedded cars alongside favorable macro-economic factors is likely to provide further impetus to the Auto Retail and Wholesale Parts industry.A stable U.S. economy, Fed’s dovish stance and healthy labor market are positives. Frequent model launches and introduction of more complex and high-tech vehicles have led consumers to take more professional help, which bode well for the industry. The shift to autonomous and electric vehicles, though a long-term prospect, may pose challenges as well as create opportunities for the Auto Retail and Wholesale Parts 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 (Strong Buy) Rank stocks here.
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 #2 firm expects its earnings to grow 4.32% year over year in fiscal 2020.
Price and Consensus: AZO
U.S. Auto Parts Network, Inc. (PRTS):
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 #3 and has an expected earnings growth rate of 54.55% for fiscal 2020.
Price and Consensus: PTRS
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 11.6% year over year in fiscal 2020.
Price and Consensus: ORLY
Headquartered in Richmond, VA, CarMax Inc. operates as a specialty retailer of used and new vehicles. The Zacks Rank #3 firm expects its earnings to grow 7.3% year over year in fiscal 2020.
Price and Consensus: KMX