Automotive- Retail and Wholesale- Parts
O’Reilly Automotive
ORLY
AutoZone
AZO
CarMax
KMX
Advance Auto Parts
AAP
Industry Overview
The automotive sector’s performance depends on its retail and wholesale network. Through dealership and retail chains, companies in the Zacks Auto Retail and Whole Sales industry carry out several tasks. These include the sale of new and used vehicles, light trucks as well as auto parts, execution of repair and maintenance services, along with the arrangement of vehicle financing. The industry, being consumer cyclical, is dependent on business cycles and economic conditions. Consumers and businesses spend more on big-ticket items when they have higher disposable income. On the contrary, when income is tight, discretionary expenses are the first to be slashed. Importantly, the coronavirus pandemic has brought considerable changes in the operating environment, with the industry laying more emphasis on e-commerce retailing, and the trend is here to stay.
3 Key Themes
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 are resulting in a fundamental restructuring of the automotive market and auto parts suppliers need to develop a detailed roadmap to make the most of the opportunities in a changing market scenario.
Increasing Longevity of Vehicles Serving as a Catalyst: The increasing average age of vehicles is driving the demand for auto parts. Per IHS Markit, the average age of U.S. vehicles hit a record of 12.1 years in 2021. The aging vehicles are a boon to the retail and wholesale auto parts industry. In a bid to ensure the long-term functioning of the aging vehicle population, customers are making investments to replace faulty vehicle parts and components, thereby boosting sales of retail and wholesale parts.
Chip Shortage Acting as a Spoiler: Shortage of semiconductor supply is hampering the balance between demand and supply and is adversely impacting vehicle production. Several auto companies have been forced to make production cuts, and the situation doesn’t appear to ease out till at least mid-2022. This is limiting the demand for retail and wholesale auto parts. Also, rising commodity costs, a tough labor market and logistical challenges are acting as headwinds. Consequently, near-term revenues and earnings of industry participants are like to be under pressure.
Zacks Industry Rank Indicates Favorable Prospects
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 #115, which places it in the top 46{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} 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 strong near-term prospects. Our research shows that the top 50{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} of the Zacks-ranked industries outperform the bottom 50{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} by a factor of more than 2 to 1.
The industry’s positioning in the top 50{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} 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 Sep 30, the industry’s earnings estimates for 2022 have increased 9.5{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}.
Considering the encouraging dynamics of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Auto Retail & Wholesale Parts industry has outperformed the Auto, Tires and Truck sector as well as Zacks S&P 500 composite over the past year. The industry has increased 27.7{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over this period compared with the S&P 500’s growth of 16.5{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. Meanwhile, the sector has lost 2.7{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over the said time frame.
One-Year Price Performance
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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 22.30X compared with the S&P 500’s 14.36X and the sector’s 12.69X.
Over the past five years, the industry has traded as high as 26.5X and as low as 15.87X, with the median being at 22.48X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
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These Stocks are Worth a Look
O’Reilly: O’Reilly is one of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. O’Reilly has been generating record revenues for 29 consecutive years on the back of growth in the auto parts market. For the current year, O’Reilly projects total revenues within $14.2-$14.5 billion, up from $13.3 billion generated in 2021. Strong cash flow generation is supporting the firm’s robust buyback program, thereby boosting investors’ confidence.
O’Reilly, which currently sports a Zacks Rank #3 (Hold), has a long-term expected EPS growth rate of 13.4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. The Zacks Consensus Estimate for its 2022 earnings and sales indicates a year-over-year uptick of 5.5{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} and 7.8{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}, respectively. ORLY has managed to pull off earnings beat in each of the last four quarters, the average surprise being 22.3{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}.
Price & Consensus: ORLY
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AutoZone: AutoZone is one of the leading specialty retailers and distributors of automotive replacement parts as well as accessories in the United States. AutoZone’s revenue growth is impressive, with the company generating record sales for 23 consecutive years. It expects the momentum to sustain through fiscal 2022 on continued strength across its DIY and commercial business amid the expansion of coverage and parts availability. Focus on increasing its market penetration via expansion of mega hubs is also set to boost long-term prospects.
AutoZone, which currently carries a Zacks Rank #3, has a long-term expected EPS growth rate of 11.3{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. The Zacks Consensus Estimate for fiscal 2022 earnings and sales indicates a year-over-year uptick of 14.2{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} and 6.2{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}, respectively. Over the trailing four quarters, AZO surpassed earnings estimates on all occasions, the average surprise being 26{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}.
Price & Consensus: AZO
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CarMax: Headquartered in Richmond, VA, CarMax operates as a specialty retailer of used vehicles. CarMax’s omni-channel strategy, with seamless integration of a world-class in-store experience and an online experience, gives the auto retailer the largest addressable market in the used car industry. The acquisition of Edmunds has further strengthened KMX’s position in the used auto ecosystem. Store-expansion initiatives, fast delivery and high-quality products are improving the company’s market share.
CarMax, which currently carries a Zacks Rank #3, has a long-term expected EPS growth rate of 15.9{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. The Zacks Consensus Estimate for fiscal 2022 and 2023 sales indicate a year-over-year uptick of 68{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} and 3{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}, respectively. Over the trailing four quarters, KMX surpassed earnings estimates in three of the trailing four quarters and missed once, the average surprise being 14.3{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}.
Price & Consensus: KMX
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Advance Auto Parts: Advance Auto operates in the U.S. automotive aftermarket industry and is engaged in selling replacement parts (excluding tires), accessories, batteries as well as maintenance items for vehicles. Advance Auto Parts’ efforts to expand and optimize its footprint by opening new stores, widening its online presence and strategic collaborations are expected to boost prospects. The multi-year agreement with Bridgestone for DieHard batteries is set to aid AAP’s top-line growth. The firm’s strong balance sheet and commitment to return shareholder capital are praiseworthy.
Advance Auto Parts, which currently carries a Zacks Rank #3, has a long-term expected EPS growth rate of 12.7{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. The Zacks Consensus Estimate for earnings and sales indicate a year-over-year uptick of 13.5{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} and 4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}, respectively. Over the trailing four quarters, AAP surpassed earnings estimates on all occasions, the average surprise being 11{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}.
Price & Consensus: AAP
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In addition to the investment ideas discussed above, would you like to know about our 10 top picks for the entirety of 2022?
From inception in 2012 through 2021, the Zacks Top 10 Stocks portfolios gained an impressive +1,001.2{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} versus the S&P 500’s +348.7{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. Now our Director of Research has combed through 4,000 companies covered by the Zacks Rank and has handpicked the best 10 tickers to buy and hold. Don’t miss your chance to get in…because the sooner you do, the more upside you stand to grab.
O’Reilly Automotive, Inc. (ORLY): Free Stock Analysis Report
Advance Auto Parts, Inc. (AAP): Free Stock Analysis Report
AutoZone, Inc. (AZO): Free Stock Analysis Report
CarMax, Inc. (KMX): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.