Original Equipment Outlook: Short-Term Bumps On Growth Path

Improving global economic conditions and an array of vehicle launches have encouraged customers to buy new vehicles. This, in turn, has increased the demand for components, which has led to amplified sales for the Original Equipment Manufacturing industry over the past few years.

The industry is also likely to get a boost from increased focus on the launch of autonomous and electric vehicles. Also, original equipment manufacturers (OEMs) have to introduce products that comply with environmental and safety standards, along with fuel efficiency to be in sync with regulations passed by various governments. All these evolving needs are expected to increase the demand for automotive equipment. OEMs have to keep on developing technologies to cater to the increasing needs. 

Over the next few years, the industry is expected to benefit primarily from emerging economies compared with the developed ones. This shift will require the OEMs to adapt to changing demand and supply pattern with respect to the production of individual regions. Also, the manufacturers have to develop their supply chain and product portfolio per the requirement of markets.

Industry Comparison with S&P 500, Sector

It seems that the industry’s performance has boosted investors’ confidence in its growth prospects. Frequent vehicle launches with hybrid applications across markets make auto manufacturers look for auto parts. The rise in demand for various types of auto parts has been driving sales at OEMs. The Zacks Auto - Original Equipment Industry, which is a 38-stock group within the broader Zacks Auto Sector, has outperformed its own sector while marginally underperforming the S&P 500.

The stocks in this industry have collectively gained 12.7%, while the Zacks Auto Sector and Zacks S&P 500 Composite have rallied 5.1% and 13.1%, respectively.

One Year Price Performance

 Original Equipment Stocks Trading Cheap

A number of metrics can be used to evaluate the industry’s valuation scenario. However, since the industry that we are discussing here is a capital intensive one, it will be apt to look into EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio or multiple as a valuation metric. We are choosing this metric over others as it considers both equity and debt while ignoring the difference in capital structures and the effect of non-cash expenses.

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