Investors keep a close track of the auto parts industry as it is considered one of the safest sectors to invest in, as the demand for auto parts usually remains unaffected by economic cycles. Despite not relying too much on new vehicle sales, the auto parts industry is expected to benefit from the demand for new vehicles, robust aftermarket sales, rising vehicle prices, and the increasing usage of advanced auto components.
While AutoZone, Inc. (AZO) possesses reasonable growth prospects, fundamentally strong auto parts stocks Miller Industries, Inc. (MLR), Standard Motor Products, Inc. (SMP), and Ituran Location and Control Ltd. (ITRN) look even better positioned than AZO to capitalize on the industry’s tailwinds. Therefore, it could be wise to buy these stocks now.
Before diving deeper into the fundamentals of these stocks, let’s discuss the auto parts industry’s prospects and why AZO may not perform as well as the three stocks.
The average price of cars has increased in recent years, and coupled with high borrowing rates, the affordability of new vehicles has become challenging. Moreover, the number of new vehicles remaining unsold has gone up. The total U.S. supply of available unsold new vehicles climbed to 2.40 million units on November 6, 2023, up 62% year-over-year.
The rising vehicle prices and high borrowing rates for new vehicles will likely push buyers to defer new car purchases and keep their existing cars longer. As a result, the demand for auto parts will likely get a boost as older vehicles need more maintenance and spare parts than cars straight out of the showroom.
Additionally, automobiles nowadays feature several high-end components, such as digital instrument clusters, infotainment systems, safety systems, battery management systems (BMS) and advanced telematics. The growing demand for such vehicle components should benefit the auto parts industry.
The growth of automotive DIY projects, albeit at a smaller scale, is also driving the auto parts industry’s growth. The global auto parts industry is projected to grow at a CAGR of 6.3% to reach $939.21 billion by 2028.
For the fiscal fourth quarter ended August 26, 2023, AZO’s net sales rose 6.4% year-over-year to $5.69 billion. Its operating profit increased 10.8% over the prior-year quarter to $1.22 billion. The company’s net income rose 6.8% year-over-year to $864.84 million. Also, its EPS came in at $46.46, representing an increase of 14.7% year-over-year.
For the quarter ending December 31, 2023, AZO’s EPS and revenue are expected to increase 13.2% and 5.2% year-over-year to $31.08 and $4.19 billion, respectively. AZO’s stock has gained 7.8% year-to-date and 8.5% over the past year to close the last trading session at $2,658.23.
However, AZO trades at an expensive valuation. In terms of forward EV/EBITDA, AZO’s 13.28x is 39.6% higher than the 9.51x industry average. Likewise, its 3.07x forward EV/Sales is 168.9% higher than the 1.14x industry average. Its 17.84x forward non-GAAP P/E is 21.3% higher than the 14.71x industry average.
While AZO is rated Buy in our proprietary rating system, investing in MLR, SMP, and ITRN could help generate even better returns. Now, let’s analyze the fundamentals of these three Auto Parts stock picks, beginning with the third choice.
Stock #3: Miller Industries, Inc. (MLR)
MLR manufactures and sells towing and recovery equipment. The company offers wreckers that are used to recover and tow disabled vehicles and other equipment; and car carriers, which are specialized flatbed vehicles with hydraulic tilt mechanisms, which are used to transport new or disabled vehicles and other equipment. It also provides transport trailers. It markets its products under the Century, Vulcan, Holmes, Challenger, Eagle, Titan, Jige, etc.
On May 31, 2023, MLR announced the acquisition of Southern Hydraulic Cylinder, Inc., a custom hydraulic cylinder manufacturer. The acquisition will bolster MLR’s efforts to improve the stability of its supply chain and will be accretive within the first year.
MLR’s 16.39% trailing-12-month Return on Common Equity is 34% higher than the 12.23% industry average. Likewise, its 8.66% trailing-12-month Return on Total Assets is 74.5% higher than the 4.96% industry average. Furthermore, the stock’s 2.03x trailing-12-month asset turnover ratio is 154.2% higher than the 0.80x industry average.
MLR’s net sales for the third quarter ended September 30, 2023, increased 33.6% over the prior-year quarter to $274.57 million. Its gross profit rose 84.9% year-over-year to $42.87 million. The company’s net income increased 233.7% year-over-year to $17.46 million. Also, its EPS came in at $1.52, representing an increase of 230.4% year-over-year.
MLR’s stock has gained 47.4% year-to-date to close the last trading session at $39.30.
MLR’s POWR Ratings reflect its solid prospects. It has an overall rating of B, equating 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 #11 out of 63 stocks in the A-rated Auto Parts industry. It has an A grade for Growth and a B for Sentiment. Click here to see the other ratings of MLR for Value, Momentum, Stability, and Quality.
Stock #2: Standard Motor Products, Inc. (SMP)
SMP manufactures and distributes automotive parts used in the automotive aftermarket industry's maintenance, repair, and service. Its Engine Management segment offers its products under Standard, Blue Streak, Intermotor, OEM, BWD select, techexpert, Locksmart, and pollak brands. Its Temperature Control segment offers its products under the Four Seasons, ACI, Hayden, Factory Air, and Everco HD brands.
SMP’s 12.75% trailing-12-month levered FCF margin is 138.6% higher than the 5.34% industry average. Likewise, its 10.76% trailing-12-month EBIT margin is 45.3% higher than the 7.40% industry average. Furthermore, the stock’s 12.80% trailing-12-month EBITDA margin is 16.3% higher than the 11.01% industry average.
For the fiscal third quarter ended September 30, 2023, SMP’s net sales rose 1.3% over the prior-year quarter to $386.41 million. Its non-GAAP operating income increased 4.2% year-over-year to $34.98 million. The company’s non-GAAP earnings from continuing operations rose 7.8% year-over-year to $24.68 million. Also, its non-GAAP EPS from continuing operations came in at $1.11, representing an increase of 5.7% year-over-year.
Analysts expect SMP’s revenue for the quarter ending December 31, 2023, to increase 2.1% year-over-year to $314.65 million. Its EPS for the quarter ending March 31, 2024, is expected to increase 10.9% year-over-year to $0.68. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past month, the stock has gained 8.6% to close the last trading session at $35.
SMP’s POWR Ratings reflect this positive outlook. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
Within the same industry, it is ranked #5. It has a B grade for Growth, Value, Sentiment, and Quality. To see the other ratings of SMP for Momentum and Stability, click here.
Stock #1: Ituran Location and Control Ltd. (ITRN)
Headquartered in Azor, Israel, ITRN provides location-based telematics services and machine-to-machine telematics products. It has two segments: Telematics Services and Telematics Products.
In terms of the trailing-12-month net income margin, ITRN's 14.01% is 588.7% higher than the 2.03% industry average. Likewise, its 20.25% trailing-12-month EBIT margin is 331.8% higher than the industry average of 4.69%. Furthermore, the stock’s 1.04x trailing-12-month asset turnover ratio is 67.8% higher than the industry average of 0.62x.
ITRN's revenues for the second quarter ended June 30, 2023, increased 10.8% year-over-year to $161.12 million. Its gross profit rose 12.3% over the prior-year quarter to $75.35 million. The company’s operating income increased 13% year-over-year to $32.56 million. Its net income attributable to the company rose 35.1% year-over-year to $23.60 million. Also, its EPS came in at $1.17, representing an increase of 37.6% year-over-year.
Street expects ITRN's EPS for the quarter ending September 30, 2023, to increase 19% year-over-year to $0.58. It surpassed the Street EPS estimates in three of the trailing four quarters. The stock has gained 19.3% year-to-date to close the last trading session at $25.20.
ITRN’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has a B grade for Value, Stability, Sentiment, and Quality. Within the Auto Parts industry, it is ranked #2. Click here to see the ratings of ITRN for Growth and Momentum.
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SMP shares were trading at $35.28 per share on Friday afternoon, up $0.28 (+0.80%). Year-to-date, SMP has gained 4.60%, versus a 19.09% 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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