3 Original Equipment Stocks to Watch Amid Weak Industry Backdrop

Core Viewpoint - The Zacks Automotive - Original Equipment Industry is facing challenges due to a decline in light vehicle production forecasts, high R&D costs, rising capital expenditures, and supply chain issues, although some companies are managing to navigate these difficulties through acquisitions, collaborations, and cost reduction initiatives [1]. Industry Description - The industry includes companies that design, produce, and provide passive safety systems for the automotive sector, as well as those involved in driveline and metal forming technologies for electric, hybrid, and internal combustion vehicles. It supplies equipment to the U.S. government and major car manufacturers, and some companies also offer equipment financing and leasing solutions [2]. Factors Influencing the Outlook - The light vehicle production forecast for North America is expected to decline from 15.7 million in 2023 to 15.5 million in 2024, with further drops anticipated to 15.4 million by 2025, which could negatively impact demand for original equipment [3]. - Companies are facing high R&D costs and rising capital expenditures as they invest in new technologies, which may strain near-term margins despite potential long-term benefits from electrification [4]. Enhanced Efficiency - Automation is transforming production processes, improving efficiency, productivity, and quality while reducing labor costs, which is essential for OEMs to remain competitive in the evolving market [5]. Industry Rank and Performance - The Zacks Automotive - Original Equipment Industry holds a Zacks Industry Rank of 168, placing it in the bottom 33% of over 250 Zacks industries, indicating dim near-term prospects [6][7]. - The industry's earnings estimates for 2024 and 2025 have decreased by 25% and 29%, respectively, over the past year, reflecting a negative outlook [8]. - The industry has underperformed the S&P 500, declining 14.3% over the past year compared to the S&P 500's growth of 30.9% [11]. Current Valuation - The industry is currently trading at a trailing 12-month price-to-earnings (P/E) ratio of 15.42X, significantly lower than the S&P 500's 22.65X and the sector's 22.19X [13]. Notable Companies - Autoliv, Inc. (ALV): A leading manufacturer of passive safety systems, with a record number of product launches in 2023 and expected growth in 2024. The company is improving labor productivity by reducing its workforce by 3,100 [15]. - Oshkosh Corporation (OSK): A producer of specialty vehicles, expecting robust revenue growth from its Next Generation Delivery Vehicle program, with production increases projected through 2025 [18]. - American Axle & Manufacturing Holdings, Inc. (AXL): A supplier of driveline systems, poised for growth from new contracts in both electric and internal combustion engine markets, with significant earnings growth estimates for 2024 and 2025 [22].