The Zacks Automotive - Original Equipment Industry is grappling with demand woes, primarily due to a year-over-year decline in light vehicle production forecast. The industry participants are also dealing with high R&D costs, rising capex and supply chain challenges. However, acquisitions, collaborations, new business wins and cost reduction drives are helping some industry players like Autoliv, Inc. ALV, Oshkosh Corporation OSK and American Axle & Manufacturing Holdings, Inc. AXL to weather the challenges.

Industry Description

The Zacks Automotive - Original Equipment Industry comprises companies that design, produce and provide passive safety systems for the automotive sector. These systems aim to improve safety, boost efficiency, reduce overall ownership costs and streamline fleet management, supporting individuals who tackle some of the toughest jobs globally.Companies that design, engineer and manufacture Driveline and Metal Forming technologies to support electric, hybrid and internal combustion vehicles are also part of the same industry. The industry supplies equipment to the U.S. government and big car manufacturers. Some companies also engage in equipment financing and leasing solutions for their customers, primarily through third-party funding arrangements.

Factors Influencing the Outlook of the Original Equipment Industry

Lower Light Vehicle Production Forecast: The demand for original equipment depends on the production level of the company’s customers. Per S&P Global, in 2023, North America produced 15.7 million cars and light trucks. But in 2024, production is expected to drop to 15.5 million due to the current reduction in inventory and adjustments to vehicle production schedules, including delays in the rollout of EV programs and extended production of internal combustion engine vehicles. By 2025, production may dip further to 15.4 million and stay steady through 2031. A drop in demand for equipment can hurt industry participants’ top-line growth.

High R&D Cost & Rising Capex: Companies are making hefty investments to keep abreast of the latest technology.While emerging trends like electrification are likely to boost the firm’s long-term prospects, they may strain near-term margins due to high launch-related R&D costs and capex requirements. High R&D costs and capex requirements for technologically advanced products, ongoing footprint activities and capacity expansion for growth may limit profits.

Enhanced Efficiency: Automation uses technology and machinery to handle tasks previously done by humans, improving efficiency, productivity, quality and safety while lowering labor costs. This innovation has revolutionized production, enabling faster and more cost-effective manufacturing. It can help OEMs stay competitive by reducing production costs, offsetting high labor expenses and enhancing efficiency. It also supports faster adaptation to market changes, improved product quality and streamlined production of electric and advanced vehicles that are crucial for staying ahead in the evolving global market.

Zacks Industry Rank Indicates Dim Near-Term Prospects

The Zacks Automotive - Original Equipment Industry is part of the broader Zacks Autos/ Tires/ Trucks sector. It carries a Zacks Industry Rank #168, which places it in the bottom 33% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dim 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 two to one.

The industry’s position 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 pessimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2024 and 2025 have moved down by 25% and 29%, respectively, over the past year.

Despite the industry’s weakness, we will present a few stocks that you might consider adding to your watchlist. Before that, let’s discuss the industry’s recent stock market performance and valuation picture.

Industry Lags S&P 500 & Sector

The ZacksAutomotive - Original Equipment Industry has underperformed the S&P 500 and its sector over the past year. The industry has declined 14.3% over this period against the S&P 500’s growth of 30.9% and the broader sector’s return of 22.6%.

One-Year Price Performance

Industry's Current Valuation

On the basis of trailing 12-month price-to-earnings (P/E), which is a commonly used multiple for valuing Automotive stocks, we see that the industry is currently trading at 15.42X compared with the S&P 500’s 22.65X and the sector’s trailing 12-month P/E of 22.19X. 

Over the last five years, the industry traded as high as 25.38X and as low as 11.16X, with a median of 18.34X, as the charts below show.

P/E Ratio (Past Five Years)

3 Stocks to Consider Right Now

Autoliv: It is one of the leading manufacturers and suppliers of a wide range of product offerings, which majorly include passive safety systems. In 2023, Autoliv saw a record number of product launches, especially in China, Europe and Japan. For 2024, the company anticipates further growth. The company is benefiting from its labor productivity, which continues to improve as the company reduces its production workforce by 3,100 compared to the previous year. This progress is driven by the implementation of strategic initiatives, such as automation and digitalization.

ALV currently carries a Zacks Rank #3 (Hold) and has a Value Score of A. The Zacks Consensus Estimate for 2025 sales and EPS implies year-over-year growth of 4% and 23.25%, respectively. The consensus mark for ALV’s 2025 EPS has moved north by 2 cents over the past seven days.

Price & Consensus: ALV

Oshkosh: It is a producer and seller of a varied range of vehicle bodies and specialty vehicles. Acquisitions have expanded the company’s range of offerings and added core capabilities. The company expects robust revenue growth from its Next Generation Delivery Vehicle program. With the ramp-up in NGDV production progressing well, the company projects production increases throughout 2025, aiming to reach full production capacity by the end of that year. This sets the stage for substantial revenue growth in 2026, bolstered by heightened production rates.

OSK currently carries a Zacks Rank #3 and has a Value Score of A. The Zacks Consensus Estimate for 2024 sales and EPS implies year-over-year growth of 9.31% and 13.73%, respectively. OSK has surpassed estimates in each of the trailing four quarters, the average earnings surprise being 14.8%.

Price & Consensus: OSK

American Axle: It is one of the leading suppliers of driveline and drivetrain systems, modules and components for the light vehicle market. The company is poised to gain from frequent business wins that underscore its strength in both electric and ICE markets. The company secured contracts to supply an electric beam axle for a Chinese OEM, launching in 2025, and EV components for a luxury European automaker. Additionally, AXL gained traction in ICE, with new component awards for various OEM programs.

AXL currently carries a Zacks Rank #3 and has a Value Score of A. The Zacks Consensus Estimate for 2024 and 2025 bottom line implies year-over-year growth of 622.22% and 14.49%, respectively. The consensus mark for AXL’s 2024 EPS has moved up 12 cents over the past 30 days.

Price & Consensus: AXL

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

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Autoliv, Inc. (ALV) : Free Stock Analysis Report

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