2 Auto Parts Retailers Well-Poised to Face Industry Challenges

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The repercussions of the UAW strike affecting the Detroit 3 automakers are expected to extend their reach into the Zacks Automotive- Retail and Wholesale- Parts industry, emphasizing the need for swift resolution in labor negotiations to minimize the fallout. Additionally, apprehensions have arisen due to the Fed’s indication of raising interest rates once more by year-end to curb inflation. These factors, combined with supply chain complications, a challenging labor landscape, and logistical hurdles, may impede the prospects of industry. Despite the promising shift toward green vehicles, the specter of elevated operational costs looms.

To navigate this uncertain landscape, businesses must enact cost-saving strategies, optimize their supply chains and remain adaptable to evolving market dynamics to uphold their competitive edge. Industry participants such as O’Reilly Automotive ORLY and AutoZone AZO appear better-positioned to confront these challenges.

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 Influencing the Industry

Disruptions Loom Amid UAW Strike: The UAW strike against Detroit Three automakers —including General Motors, Ford, and Stellantis — carries potential repercussions that extend well beyond the immediate production standstill. While the immediate consequences are evident in the disruption of high-demand vehicle manufacturing, such as Ford Bronco, Jeep Wrangler, and Chevrolet Colorado, the ripple effects could be profound. One significant impact could be felt by auto retail parts companies. The strike’s potential to halt parts production threatens to disrupt the supply chain, resulting in limited availability of components at dealerships for routine maintenance and repairs. This could cause inconvenience for vehicle owners and lead to longer wait times for servicing, potentially damaging customer satisfaction and brand loyalty.

Navigating Electrification’s Challenges and Opportunities: As the automotive landscape shifts toward more advanced and technologically intricate vehicles, consumers are increasingly seeking professional assistance, presenting a fresh array of opportunities for industry players. However, this transformation also entails escalating capital expenditure and research and development expenses due to the development of cutting-edge technological platforms and sophisticated tools. In light of these shifts, the auto retail parts sector must strategically chart its course to fully leverage these opportunities in a dynamic market environment. The adoption of omnichannel marketing and digitalization is driving up operational costs, potentially curbing profit margins.

Inflationary Concerns: Inflation poses a challenge to the auto retail parts industry. The combination of an inflationary environment and supply chain constraints is driving up operational costs, impacting profit margins. The Federal Reserve’s recent decision to maintain interest rates, albeit the possibility of one more hike before the year end, further compounds the industry’s woes, as high interest rates can hinder growth and increase borrowing costs. Rising expenses, exacerbated by distribution inefficiencies, labor difficulties and global logistics issues are putting pressure on industry players.

Zacks Industry Rank Paints a Lackluster Picture

The Zacks Auto Retail & Wholesale Parts industry is a four-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #217, which places it in the bottom 11% 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 grim 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 tepid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Over the past six months, the industry’s earnings estimate for 2023 has declined 4.7%.

Despite the bleak prospects of the industry, we will present a couple of stocks that may hold their ground. But it’s worth taking 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 12.4% over this period compared with the S&P 500 growth of 17.4%. Meanwhile, the sector has lost 3.7% over the same time frame.

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.

Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 66.26X compared with the S&P 500’s 13.13X and the sector’s 13.25X.

Over the past five years, the industry has traded as high as 67.51X and as low as 15.90X, with the median being 23.98X.

2 Stocks to Watch

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 and store expansion efforts. ORLY is poised to benefit from store openings and distribution centers in profitable regions.  The company’s dual-market strategy and a strong distribution network bode well. O’Reilly’s wide-ranging product portfolio caters to DIY and DIFM customers, which are driving comparable store sales growth. Strong cash flow generation supports the firm’s robust buyback program, thereby boosting investors’ confidence.

O’Reilly currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2023 earnings and sales indicates a year-over-year uptick of 12.5% and 8.6%, respectively. The consensus mark for 2024 EPS and revenues suggests year-over-year growth of 5.5% and 11%, respectively. ORLY pulled off earnings beat in the last four quarters, the average surprise being 5.5%.

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 34 straight years and the trend is expected to continue. The company’s high-quality products, store-expansion initiatives and omni-channel efforts to improve customer shopping experience are boosting its market share. Expanded hub and mega-hub rollouts along with expansion of the distribution center footprint bode well. Ramp up of e-commerce efforts are driving traffic to the company’s website, thereby helping the company to deliver sizzling growth. AutoZone’s solid share repurchase program also sparks optimism.

AutoZone currently carries a Zacks Rank #3. The Zacks Consensus Estimate for its fiscal 2024 earnings and sales indicates a year-over-year uptick of 9.3% and 4.3%, respectively. The consensus mark for fiscal 2025 EPS and revenues suggests year-over-year growth of 11% and 4.6%, respectively. AZO pulled off earnings beat in the last four quarters, the average surprise being 9.9%.
O’Reilly Automotive, Inc. (ORLY): Free Stock Analysis Report

AutoZone, Inc. (AZO): Free Stock Analysis Report

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