Tariffs levied by the Trump administration on imported vehicles and auto equipment have made the prospects of Zacks Automotive - Original Equipment Industryhighly uncertain. Moreover, an expected decline in light vehicle production in the first quarter of 2025 is likely to reduce demand for auto equipment. However, international presence, acquisitions and focus on advanced technology and continued innovation are helping industry players like American Axle & Manufacturing Holdings, Inc. AXL, Allison Transmission Holdings, Inc. ALSN and Adient plc ADNT to stay afloat in testing times.

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 Shaping the Prospects of the Original Equipment Industry

Import Tariffs Levied by the Trump Administration: The current administration is focused on protectionism that restricts international trade to help domestic industries. The policy will levy up to 25% tariff on non-U.S.-based auto equipment manufacturers, undercutting their profits. Moreover, the administration could offer tax incentives to companies that invest in U.S.-based manufacturing, encouraging companies to resort to local auto equipment manufacturers.

Expected Decline in Light Vehicle Production:Overall, light vehicle output is projected to decline 1.8% year over year in the first quarter of 2025 and 0.5% in the full-year 2025. The anticipated decline in light vehicle production in the first quarter of 2025 is expected to reduce demand for auto equipment, which will take a toll on companies’ top line. Ongoing challenges in Europe and continued inventory adjustments in North America are contributing to this decrease in production.

Technological Advancements: Automation leverages technology and machinery to perform tasks once handled by humans to enhance efficiency, productivity, quality and safety while reducing labor costs. This advancement has transformed manufacturing by enabling faster and more cost-effective production. It helps OEMs remain competitive by cutting production expenses, compensating for high labor costs and boosting efficiency. Additionally, automation facilitates quicker responses to market shifts, improves product quality and streamlines the production of electric and advanced vehicles, which are essential for maintaining a competitive edge 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 #148, which places it in the bottom 40% 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 2025 and 2026 have moved down by 26.40% and 19.80%, 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 the 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 11.7% over this period against the S&P 500’s growth of 15.1%. The broader sector has declined 1.4% in the same time frame.

One-Year Price Performance

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Industry's Current Valuation

Since automotive companies are debt-laden, it makes sense to value them based on the Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) ratio.

Based on the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 19.25X compared with the S&P 500’s 17.27X and the sector’s 18.69X.

Over the past five years, the industry has traded as high as 22.09X and as low as 4X, with the median being 12.69X, as the chart below shows.

EV/EBITDA Ratio (Past 5 Years)

Image Source: Zacks Investment Research

Image Source: Zacks Investment Research

3 Stocks to Consider Right Now

American Axle: It is a leading supplier of driveline and drivetrain systems, modules and components for the light vehicle market. The company is advancing in the electric drive space, with its Inovance collaboration boosting electrification revenues. Its expanding electrification portfolio strengthens its market position. Its efforts to optimize its portfolio via buyouts and divestitures also bode well.

AXL currently carries a Zacks Rank #3 (Hold) and has a Value Score of A. The Zacks Consensus Estimate for 2025 EPS implies year-over-year growth of 13.92%. AXL has surpassed estimates in each of the trailing four quarters, the average earnings surprise being 928.75%.

Price & Consensus: AXL

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

Allison: It is a manufacturer of fully automatic transmissions for medium and heavy-duty commercial and heavy-tactical U.S. defense vehicles. In early 2024, Allison entered the Brazilian ag sprayer market, tapping into South America's largest agricultural economy and expanding its Off-Highway business. The company has deepened ties with Yutong, enhancing its presence in Rwanda, and partnered with LGMG and SANY to strengthen its foothold in the global mining sector, focusing on Africa, Asia, and South America. These partnerships position Allison for growth in export markets. Its focus on advanced technology and continued innovation in product development also augur well. 

ALSN currently carries a Zacks Rank #3 and has a Value Score of B. The Zacks Consensus Estimate for 2025 sales and EPS implies year-over-year growth of 1.53% and 6.26%, respectively. The consensus mark for its 2026 sales and EPS implies year-over-year growth of 6.58% and 11.73%, respectively.

Price & Consensus: ALSN

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Adient: It is one of the world’s largest automotive seating suppliers. Adient has been gaining customers with its broad range of products. Launch execution continues to be an area of focus for Adient and a key building block to win new business. Given the customer and geographic mix, the company’s market position is likely to strengthen going forward. Adient's push for automation and modularity is paying off in 2025. Automation is cutting labor costs while boosting quality, speed and safety. 

ADNT currently carries a Zacks Rank #3 and has a Value Score of A. The Zacks Consensus Estimate for 2026 sales and EPS implies year-over-year growth of 1.71% and 43.08%, respectively. ADNT surpassed estimates in three of the trailing four quarters and missed once, the average earnings surprise being 5.04%.

Price & Consensus: ADNT

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This article originally published on Zacks Investment Research (zacks.com).

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