4 Resilient Auto Equipment Stocks Thriving in a Changing Landscape

The Zacks Automotive – Original Equipment industry is expected to witness growth on pent-up demand for vehicles amid improving inventory levels. With the shift toward electric vehicles and self-driving cars, industry players need to adjust their business models to adapt to these changing dynamics through systematic research and development. The emergence of new technologies and the growing demand for electrified and autonomous vehicles present fresh opportunities for industry participants. The success of the industry hinges on effectively managing the rising costs associated with mass production and advanced technology. BorgWarner Inc. BWA, Oshkosh Corporation OSK, Allison Transmission ALSN and Wabash National Corporation WNC are expected to be among the winning companies in this industry.

About the Industry

The Zacks Automotive – Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering, and suspension, as well as brakes. Demand for original equipment depends directly on the sale of vehicles, which, in turn, is heavily reliant on economic growth and consumer confidence. Importantly, the rapidly globalizing world is opening up newer avenues for auto-equipment manufacturers who need to adapt to the changing dynamics through systematic research and development. From a future competitive standpoint, the industry players need to focus on technologies that offer the best value in a short span of time to the market.

3 Key Themes

Resilient Vehicle Sales Amid Challenges: Despite economic headwinds and interest rate hikes, the demand for vehicles remains strong. Pent-up demand, along with increased inventory levels and fleet deliveries, is fueling new-vehicle sales. In April, sales exceeded the projections by Cox Automotive. After a slight decline to 14.9 million in March, the seasonally adjusted annualized sales rate rallied to an impressive 16.15 million last month, surpassing both forecasts and April 2022’s reading of 14.52 million. LMC has raised its 2023 U.S. sales forecast for the second consecutive month, now predicting 15.3 million new car and light-truck deliveries this year, citing rising inventories and more stable production. This strong demand bodes well for industry participants.

Revolutionary Technology Opens New Avenues: The automotive industry is undergoing a transformative shift due to widespread technology adoption and rapid digitization, leading to a fundamental restructuring of the market. This transformation presents considerable opportunities for original equipment manufacturers (OEMs). As electric vehicle (EV) and autonomous vehicle (AV) trends continue to gain momentum, OEMs are intensifying their efforts to develop technologically advanced components. Moreover, the rising demand for fuel-efficient vehicles, driven by strict emission regulations, is fueling the need for high-quality and cost-effective auto components and equipment.

Efficient Production Cost Management: Cost management is crucial in the current scenario as the automotive market undergoes a significant technological transformation. Original Equipment Manufacturers (OEMs) must enhance and update their products to keep up with the changing trends. The introduction of new features, upgrades, and component designs requires substantial financial resources, time, and labor, resulting in increased R&D expenses. Efficient management of production costs is necessary to alleviate the pressure on profit margins. The performance of industry players will be determined by their ability to absorb expenses associated with manufacturing and expansion, enabling them to take advantage of lucrative revenue opportunities. Additionally, equipment manufacturing companies must prioritize technology that provides the greatest value in a short period to remain competitive in the future.

Zacks Industry Rank Holds Promise

The Zacks Automotive – Original Equipment industry is a 58-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #106, which places it in the top 42% 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 bright 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Since March, the industry’s earnings estimates for 2023 have moved up around 4%.

Before we present a few stocks that you may invest in to cash in on the industry’s potential, it’s worth taking a look at the industry’s performance and current valuation.

Industry Tops Sector But Lags S&P 500

Over the past year, the Zacks Original Equipment industry has outperformed the broader Auto sector but lagged the Zacks S&P 500 composite. The industry has lost 3.2% compared with the sector’s decline of 28.1%. Meanwhile, the S&P 500 has moved up 1.3% over the same timeframe.

One-Year Price Performance

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.

On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 20.29X compared with the S&P 500’s 12.49X and the sector’s 8.93X.

Over the past five years, the industry has traded as high as 23.06X, as low as 3.90X and at a median of 7.92X, as the chart below shows.

EV/EBITDA Ratio (Past Five Years)

4 Stocks to Bet on

Allison: It is a manufacturer of fully-automatic transmissions for medium and heavy-duty commercial and heavy-tactical U.S. defense vehicles. Strategic buyouts of Walker Die, C&R Tool & Engineering, Vantage Power, the Off-Highway transmission portfolio of AVTEC and AxleTech’s EV systems division are set to boost Allison’s prospects. Regular product launches, including FracTran, TerraTran and the 3414 Regional Haul Series fully automatic transmission, bode well. The company’s electric solutions promise growth opportunities. Allison’s eGen Power portfolio comprising 100S, 100D, 130S and 130D e-axles demonstrates its ability to adapt to the changing dynamics of the auto industry.

Allison currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for 2023 top and bottom lines implies year-over-year growth of 7.2% and 18.6%, respectively. The consensus mark for 2023 EPS has moved up 5 cents over the past seven days.

Price & Consensus: ALSN

Wabash: It is one of the leading manufacturers of semi-trailers in North America. The company’s customer-centric strategy, enhanced distribution capabilities and e-commerce ramp-up seem to be bearing fruit. A solid backlog supported by a long-term customer agreement, including its partnership with J.B. Hunt, augurs well. The company exited 2022 with a record backlog of $3.4 billion, providing significant visibility into 2024 as well. The company generated record sales and profits in 2022. Encouragingly, it expects 2023 revenues to rise 16% year over year and earnings to grow 27%, at the midpoint of the guidance. Balance sheet strength with strong liquidity and no near-term debt maturities are the other positives.

Wabash currently sports a Zacks Rank #1. The Zacks Consensus Estimate for 2023 top and bottom line implies year-over-year growth of 12% and 91%, respectively. The consensus mark for 2023 EPS has moved up 48% over the past 30 days.

Price & Consensus: WNC

BorgWarner: It is a global leader in clean and efficient technology solutions for combustion, hybrid and electric vehicles.The acquisition of Delphi has strengthened BorgWarner’s electric propulsion leadership. The AKASOL buyout has expanded BorgWarner’s commercial vehicle electrification capabilities. For full-year 2023, BorgWarner anticipates net sales within $17.1-$17.9 billion, indicating year-over-year growth of 7.5-12.5%, driven by growth across all business segments. The Charging Forward project, intended to accelerate its electrification strategy, bodes well. The company is on track to achieve more than $5.6 billion of revenues by 2025 through the sales of eProducts, thanks to new business awards and strategic actions.

BorgWarner currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2023 top and bottom lines implies year-over-year growth of 13.3% and 7.6%, respectively. The consensus mark for 2023 EPS has moved up 10 cents over the past 30 days.

Price & Consensus: BWA

Oshkosh: It is a producer and seller of a varied range of vehicle bodies and specialty vehicles. Frequent business wins and a comprehensive offering of innovative new products are set to drive Oshkosh’s prospects. Record consolidated backlog of $14.8 billion provides enough visibility for the coming years. The Hinowa buyout has accelerated Oshkosh’s electrification capabilities, providing growth opportunities across core and adjacent markets. Its upbeat full-year 2023 outlook raises confidence. The firm’s balance sheet strength and investor-friendly moves further instill optimism.

Oshkosh currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2023 top and bottom lines implies year-over-year growth of 5.4% and 76%, respectively. The consensus mark for 2023 EPS has moved up 5 cents over the past seven days.

Price & Consensus: OSK

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

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