Dj Autozone Inc. Stock Underperforms Friday When Compared To Competitors Despite Daily Gains

Predicting the actions of an incoming administration is always tricky, and that's doubly true for someone with a penchant for saber rattling like Donald Trump. While Trump seems committed to another round of tariffs (especially aimed at Chinese imports), the actual size and scope of these moves remains to be seen.

Many business leaders and executives are preparing for new tariffs by readying consumers for increased costs, and the retail sector could be hit hard if the most protective policies come to fruition.

However, not every company stands to suffer from tariff expansion. Some industries, like domestic shippers and specialty retailers, saw a boost in the wake of the election results.

Here are five stocks that stand to benefit from American tariffs on foreign imports.

Methodology

To find stocks that will benefit from tariffs, we need to look for firms with reliable production alternatives outside China and the ability to pass on extra costs to consumers.

If a company’s main competitors have high import costs or lack that kind of pricing power, even better.

Let’s go through the list:

AutoZone Inc.

DIY auto store stocks have soared in the post-pandemic era, and the two clear winners have been AutoZone and Oreilly Automotive Inc. . Both companies have had little issue raising prices during previous tariff implementations, and investors have no reason to assume they won't do the same in the face of the next round.

AutoZone is uniquely positioned to benefit from a higher tariff environment. Even when the first round of tariffs was administered during Trump's initial term, AutoZone still managed to improve its profit margins despite higher costs. Additionally, DIY auto parts stores often hold significant pricing power over consumers since fixing a car is usually a non-negotiable part of life in America (especially in the suburbs). CEO Philip Daniele recently stated that the company intends to pass any tariff increases back onto consumers, which could prompt a flurry of car repair activity before the calendar flips to 2025.

For Immediate Release

Chicago, IL – November 20, 2024 – Today, Zacks Equity Research discusses O’Reilly Automotive ORLY and AutoZone AZO.

Industry: Auto Parts

Link: https://www.zacks.com/commentary/2371960/2-auto-parts-retailers-better-equipped-to-navigate-industry-woes

The near-term outlook for the Zacks Automotive - Retail and Wholesale - Parts industry remains subdued. U.S. new car sales declined for the second straight quarter in the third quarter of 2024, with the full-year vehicle sales outlook being trimmed. Additionally, the industry is navigating challenges, including the shift away from DIY repairs due to the complexity of modern vehicles and the need for significant capital expenditures to keep pace with technological advancements and digitization.

The only bright spot is an aging vehicle fleet, which is leading to increased demand for replacement parts as consumers. O’Reilly Automotive and AutoZone are two industry players poised to navigate this dynamic industry environment better.

Industry Overview

The Zacks Automotive - Retail and Wholesale - Parts industry players execute several functions. These include retailing, distribution and installation of vehicle parts, equipment and accessories. Vehicle parts and accessories include seat covers, antifreeze, engine additives, wiper blades, batteries, brake system components, belts, chassis parts, driveline parts, engine parts and fuel pumps.

Consumers have two options. They can either opt for repairing vehicles on their own (the ‘do-it-yourself’ or ‘DIY’ segment) or take the assistance of a professional repair facility (the ‘do-it-for-me’ or ‘DIFM’ segment). The industry is highly competitive and undergoing a radical change, with evolving customer expectations and technological innovation acting as game changers.

Factors at Play

Aging Vehicles Fuel Parts Demand: In 2024, the average age of vehicles in the United States reached 12.6 years, continuing a seven-year trend of increase. This drove growth in the auto parts industry, as older vehicles require more frequent maintenance and replacement parts. With consumers spending more to keep their aging cars running, the demand for auto parts has surged, supporting industry expansion.

Decline in Vehicle Sales: New car sales in the United States dropped approximately 2% year over year in third-quarter 2024, marking the second consecutive quarterly decline, according to U.S. Automotive News. Experts predict continued instability through the end of the year. Forecasts for North American light-vehicle production were cut from 15.8 million to 15.5 million units due to delays and production adjustments aimed at managing inventory.

Similarly, S&P Global Mobility revised its 2024 U.S. sales outlook to 15.9 million, down from 16 million, while Cox Automotive estimates sales at 15.7 million. This slowdown creates challenges for auto parts retailers, who may feel the strain of weakening demand.

Technology Disrupts DIY Repairs: Advances in vehicle technology are transforming the auto parts landscape. As cars become increasingly complex, fewer consumers are performing their own repairs, choosing professional services instead. This shift is diminishing the role of the DIY market, potentially reducing its share within the broader auto parts industry.

High Capital Demands Challenge Profitability: The rapid pace of technological change, including the rise of electric and autonomous vehicles, has led to substantial capital expenditure needs in the auto parts industry. While these advancements unlock new growth avenues, they come with steep costs. Additionally, investments in new stores, distribution centers and omnichannel marketing are placing further strain on resources, potentially impacting overall profitability.

Zacks Industry Rank Paints a Glum Picture

The Zacks Auto Retail & Wholesale Parts industry is within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #189, which places it in the bottom 24% 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 tepid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are getting optimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2024 and 2025 have contracted around 8.4% and 11%, respectively, over the past year.

Before we present a few stocks that could still be on your watchlist, let’s take a look at the industry’s shareholder returns and current valuation first.

Industry Lags S&P 500 But Tops Sector

The Zacks Auto Retail and Wholesale Parts industry has outperformed the Auto, Tires and Truck sector but underperformed the Zacks S&P 500 composite over the past year. The industry has soared 11.5% over this period compared with the S&P 500 growth of 29.2%. Meanwhile, the sector has increased 8%.

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.

Based on the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 49.8X compared with the S&P 500’s 18.22X and the sector’s 18.46X.

Over the past five years, the industry has traded as high as 50.97X and as low as 14.03X, with the median being 25.26X.

2 Stocks Worth a Look

O’Reilly: It is one of the noted retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The company has been generating record revenues for 31 consecutive years due to growth in the auto parts market and store expansion efforts. For 2024, O’Reilly projects total revenues in the $16.6-$16.8 billion band, up from $15.8 billion in 2023.

With its second international expansion, O'Reilly forayed into Canada by acquiring Groupe Del Vasto — a transaction that closed in January 2024. ORLY is poised to benefit from store openings and distribution centers in profitable regions. The company’s dual-market strategy and strong distribution network bode well. Strong cash flow generation supports the firm’s robust buyback program, boosting investors’ confidence.

O’Reilly currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2024 EPS and sales indicates a year-over-year uptick of 6% and 5%, respectively. The consensus mark for 2025 EPS and sales suggests growth of 9% and 5.4% from 2024 projected levels, respectively.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AutoZone: It is one of the leading specialty retailers and distributors of automotive replacement parts and accessories in the United States. The company has been generating record revenues for 35 straight years and the trend is expected to continue. The company’s high-quality products, store-expansion initiatives and omni-channel efforts to improve customer shopping experience are boosting its market share.

With 109 mega hub locations at the end of fiscal 2024, AutoZone is halfway through its objective of establishing over 200 mega hubs. The ramp-up of e-commerce efforts is driving traffic to the company’s website, helping the company to deliver growth. AutoZone’s solid share repurchase program also sparks optimism.

AutoZone currently carries a Zacks Rank #3. The Zacks Consensus Estimate for its fiscal 2025 earnings and sales indicates a year-over-year uptick of 8% and 2%, respectively. The consensus mark for fiscal 2026 EPS and revenues suggests year-over-year growth of 12% and 5.4%, respectively.

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