2 Auto Parts Retailer Stocks Poised to Grow Amid Industry Challenges

Core Viewpoint - The Zacks Automotive - Retail and Wholesale - Parts industry faces significant challenges, particularly in the DIY segment, due to cautious consumer spending, while the demand for electric and autonomous vehicles offers growth opportunities, albeit with high capital expenditures impacting cash flows. The increasing average age of light vehicles is a strategic advantage for the industry, with O'Reilly Automotive, Inc. and AutoZone, Inc. positioned to benefit from these market dynamics [1]. Industry Overview - The Zacks Automotive – Retail and Wholesale – Parts industry involves retail, distribution, and installation of vehicle components, including various parts and accessories. Customers can choose between DIY repairs or professional services, with the industry experiencing competitive pressures and transformative shifts due to changing customer preferences and technological advancements [2]. Factors Influencing the Industry Outlook - The average age of vehicles in the U.S. has risen from 11.1 years to 12.6 years over the past decade, leading to increased demand for maintenance and parts replacements as older vehicles require more frequent servicing [3]. Weakness in DIY Segment - The DIY segment is facing challenges due to economic constraints leading to restrained consumer spending. Many customers are forced to undertake repairs out of necessity, which negatively impacts sales and gross margins. Limited recovery prospects in this segment are anticipated over the next 12 to 18 months [4]. High Capital Requirement - Auto part retailers are increasing investments in technology to enhance electronic catalog systems, which may constrain short-term cash flow. Additionally, resources are being allocated for rapid store expansions to bring inventory closer to customers [5]. Zacks Industry Rank - The Zacks Auto Retail & Wholesale Parts industry is ranked 157, placing it in the bottom 37% of approximately 250 Zacks industries, indicating tepid near-term prospects [6][7]. Earnings Outlook - The industry's positioning in the bottom 50% of Zacks-ranked industries is attributed to a negative earnings outlook, with aggregate earnings estimates for 2025 contracting by around 12.7% over the past year [8]. Industry Performance - The Zacks Auto Retail and Wholesale Parts industry has underperformed compared to the Auto, Tires and Truck sector and the Zacks S&P 500 composite, with a growth of 14.8% over the past year, while the sector and S&P 500 grew by 25.2% and 23%, respectively [10][11]. Current Valuation - The industry is currently trading at an EV/EBITDA ratio of 40.46X, significantly higher than the S&P 500's 18.20X and the sector's 21.26X. Over the past five years, the industry has traded between 14.13X and 42.61X, with a median of 28.99X [14][15]. Company Highlights - O'Reilly Automotive, Inc.: A leading specialty retailer of automotive aftermarket parts, O'Reilly has expanded into Mexico and Canada, operating 78 stores in Mexico and 26 in Canada. The company has generated record revenues for 31 consecutive years, with growth driven by vehicle longevity and store expansion. The Zacks Consensus Estimate for 2024 sales and EPS implies year-over-year growth of 5.24% and 6.19%, respectively [18][19]. - AutoZone, Inc.: A major retailer and distributor of automotive replacement parts, AutoZone is focusing on market penetration through mega hub expansions and plans to open up to 200 stores annually in Mexico and Brazil by 2028. The company's omni-channel efforts are enhancing customer experience and driving growth, with the Zacks Consensus Estimate for fiscal 2025 sales and EPS implying year-over-year growth of 1.63% and 4.76%, respectively [21][22][23].