Despite fears of a recession, the auto parts industry is well-positioned to grow thanks to its ability to survive various economic cycles. Fundamentally strong industry participants AutoZone (AZO), Genuine Parts Company (GPC), and Magna International (MGA) are outperforming their peers. Therefore, it could be wise to buy these stocks. Read more….
The automobile industry endured several challenges last year due to supply chain disruptions, high inflation, and rising interest rates. The sales of light vehicles in 2022 fell to their lowest level since 2012. Over 13.75 million light vehicles were sold the previous year, representing a year-over-year decline of 8% to 9%.
Although closely linked to the automobile industry, the auto parts industry is not entirely dependent on new vehicle sales. This makes the sector attractive from an investment standpoint as it can remain insulated against the volatility caused by economic cycles. Therefore, quality auto parts stocks AutoZone, Inc. (AZO), Genuine Parts Company (GPC), and Magna International Inc. (MGA) could be wise additions to your portfolio now.
Before diving deeper into the fundamentals of these stocks, let’s discuss why investing in the auto parts industry could be prudent.
According to Cox Automotive, new-vehicle sales for 2023 are forecasted to increase 3% year-over-year to 14.20 million units. Although auto parts companies only partially rely on new-vehicle sales for their growth, the increase in new-vehicle sales is expected to benefit the industry.
The Fed staff expects the economy to enter a mild recession later this year. The auto parts industry is unlikely to be affected as it enjoys stable demand as people maintain and repair their vehicles irrespective of economic cycles.
Moreover, with the increasing use of advanced technology and components inside newer vehicles, the auto parts industry is expected to grow substantially in the long run. The global automotive OEM market size is expected to grow at a CAGR of 4.2% to hit $46 billion by 2030. In addition, the global automotive aftermarket industry’s revenue is expected to grow at a CAGR of 4% to reach $589.01 billion by 2030.
Considering these factors, it could be wise to buy the featured stocks. Let’s take a closer look at their fundamentals.
AutoZone, Inc. (AZO)
AZO retails and distributes automotive replacement parts and accessories. The company offers various products for cars, sport utility vehicles, vans, and light trucks. Its products include A/C compressors, batteries, and accessories, bearings, belts and hoses, calipers, chassis, clutches, CV axles, engines, fuel pumps, fuses, ignition and lighting products, mufflers, radiators, etc.
In terms of the trailing-12-month gross profit margin, AZO’s 51.43% is 46.3% higher than the 35.15% industry average. Likewise, its 22.19% trailing-12-month EBITDA margin is 103.7% higher than the industry average of 10.90%. Furthermore, the stock’s 10.98% trailing-12-month levered FCF margin is 286% higher than the industry average of 2.85%.
AZO’s net sales for the second quarter ended February 11, 2023, increased 9.5% year-over-year to $3.69 billion. Its total store count increased 2.9% year-over-year to 7,014. The company’s net income rose 1% over the prior-year quarter to $476.54 million.
In addition, its EPS came in at $24.64, representing an increase of 10.5% year-over-year. Also, its cash and cash equivalents increased 25.8% year-over-year to $301.29 million.
Analysts expect AZO’s EPS and revenue for the quarter ending May 30, 2023, to increase 8.4% and 6.6% year-over-year to $31.47 and $4.12 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 40.4% to close the last trading session at $2,653.18.
AZO’s POWR Ratings reflect this positive outlook. AZO has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #24 out of 58 stocks in the A-rated Auto Parts industry. It has an A grade for Quality and a B for Growth and Sentiment. Click here to see the other ratings of AZO for Value, Momentum, and Stability.
Genuine Parts Company (GPC)
GPC is a service company that distributes automotive and industrial replacement parts. Its segments include Automotive Parts Group and Industrial Parts Group.
On March 22, 2023, GPC announced the selection of Google Cloud as the innovation partner for its business transformation. GPC expects to leverage Google Cloud offerings to optimize the technology infrastructure. Google Cloud’s advanced data and analytics platforms will enable supply chain modernization around inventory visibility, facility productivity, and logistics.
In terms of the trailing-12-month net income margin, GPC’s 5.50% is 25.6% higher than the 4.38% industry average. Likewise, its 7.69% trailing-12-month EBIT margin is 4% higher than the industry average of 7.39%. Furthermore, the stock’s 3.81% trailing-12-month levered FCF margin is 33.8% higher than the industry average of 2.85%.
For the first quarter ended March 31, 2023, GPC’s net sales increased 8.9% year-over-year to $5.77 billion. Its adjusted net income rose 14.4% over the prior-year quarter to $303.96 million. Also, its EPS came in at $2.14, representing an increase of 15.1% year-over-year.
For the quarter ending June 30, 2023, GPC’s EPS and revenue are expected to increase 4.8% and 6.2% year-over-year to $2.31 and $5.95 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 24.8% to close the last trading session at $164.77.
GPC’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to Buy in our proprietary rating system.
It has a B grade for Sentiment and Quality. Within the same industry, it is ranked #18. To see the other ratings of GPC for Growth, Value, Momentum, and Stability, click here.
Magna International Inc. (MGA)
Headquartered in Aurora, Canada, MGA designs, engineers, and manufactures components, assemblies, systems, subsystems, and modules for original equipment manufacturers of vehicles and light trucks worldwide. It operates through four segments: Body Exteriors & Structures, Power & Vision, Seating Systems, and Complete Vehicles.
On April 17, 2023, MGA announced that it added a new customer in engineering and complete vehicle manufacturing. The company was awarded a contract to manufacture the INEOS automotive electric off-road vehicle, slated to commence production in Graz, Austria, in 2026. MGA will also be responsible for the engineering of the complete vehicle.
Magna Complete Vehicles’ Interim President, Roland Prettner, said, “This new electric vehicle adds nicely to our line-up in Austria and showcases our flexibility in producing a range of vehicles from ICE-based to fully electric.”
In terms of the trailing-12-month Capex/Sales, MGA’s 4.87% is 53.7% higher than the 3.17% industry average. Likewise, its 1.31x trailing-12-month asset turnover ratio is 29.7% higher than the industry average of 1.01x.
MGA’s sales for the first quarter ended March 31, 2023, increased 10.7% year-over-year to $10.67 billion. Its cash provided from operating activities increased 26.1% year-over-year to $227 million. The company’s net income attributable to MGA came in at $209 million. Also, its adjusted EBIT and adjusted EPS came in at $437 million and $1.11, respectively.
Analysts expect MGA’s EPS and revenue for the quarter ending June 2023 to increase 43.9% and 10% year-over-year to $1.19 and $10.30 billion, respectively. Over the past month, the stock has declined 1.8% to close the last trading session at $52.73.
MGA’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to Buy in our proprietary rating system.
It is ranked #22 in the Auto Parts industry. It has a B grade for Growth and Sentiment. Click here to see the other ratings of MGA for Value, Momentum, Stability, and Quality.
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AZO shares were trading at $2,645.28 per share on Monday morning, down $7.90 (-0.30%). Year-to-date, AZO has gained 7.26%, versus a 10.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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