US Vehicles Average Age Rises to 12.2 Years: 3 Stocks to Watch

Per the latest report by S&P Global Mobility, the average age of U.S. vehicles hit a new record of 12.2 years in 2021. This marks the fifth consecutive year of increase in the average age of vehicles on U.S. roadways.

These aging vehicles could serve as a catalyst for auto replacement parts companies like Genuine Parts Company GPC, LKQ Corp LKQ and Standard Motor Products SMP. But before delving into that, let’s take a look at the factors that are lifting U.S. vehicles’ average age and find out whether the auto replacement parts companies are in for a smooth ride in the days ahead.

What’s Driving This Increase?

For starters, the quality of vehicles has improved amid the technological advancement as a result of which they are lasting longer. But what has really moved the needle over the past two years has been the pandemic-induced chip crunch. It should be noted that the average age of vehicles crossed 12 years for the first time in 2020. The chip famine had forced automakers to slash production owing to the scarcity of parts. Supply chain disruptions tightened inventory levels of both new and used vehicles in the dealerships. This is likely to have influenced customers to continue using their existing vehicles rather than replacing them with a new vehicle.

While the demand for cars has been strong, automakers haven’t been able to keep pace with the buyers’ appetite. This supply-demand mismatch has resulted in rising prices of vehicles, which brings us to the third factor contributing to the increasing average of vehicles. With the prices of vehicles going through the roof, more buyers have been choosing to postpone purchases. Customers are not willing to pay a heavy premium and instead prefer waiting and continue using their existing vehicle longer.

Momentum to Sustain

The average age of U.S. vehicles is expected to keep rising for the next couple of years as the auto industry continues to battle the chip dearth, which is preventing the dealerships from replenishing their lots. As we know, the supply chain snafu has been compounded by the Russia-Ukraine war and the resurgence of COVID-19 restrictions in China. This will likely keep a lid on inventory levels. Many industry watchers believe that this chip shortage will linger well into 2023, leading to lost production and revenues for carmakers. Additionally, 40-year high inflation, rising interest rates and concerns regarding economic slowdown will likely result in customers delaying discretionary expenses like cars, especially when the prices of the same would continue to be high amid tight inventory.

Aging Vehicles a Boon for Auto Replacement Parts Firms

It should be noted that the scrappage rate in 2021 as a percentage of total vehicles on road was just 4.2% — the lowest in the past 20 years. And this comes as a stark contrast to the 2020 rate of 5.6% — the second-highest scrappage rate in two decades. Meanwhile, vehicle miles traveled has also returned to pre-pandemic levels. Per S&P global Mobility, U.S. light vehicles traveled around 12,300 miles on average, up 10% from the 2020 levels. Miles traveled are anticipated to witness a similar rate of increase in 2022.

With drivers putting more miles on their cars coupled with the increasing average age of vehicles, the need to fix and repair these aging vehicles is set to drive the business of auto replacement and repair companies.In a bid to ensure the long-term functioning of the aging vehicles, customers will more likely spend on expensive repairs instead of splurging on a high-priced new vehicle amid economic uncertainty.

The longevity of vehicles, will thus, act as a tailwind for the auto replacement parts industry. In this regard, below we have highlighted a few stocks from the industry that could benefit from the trend of increasing average age of vehicles.

3 Stocks to Keep an Eye on

Genuine Parts: Atlanta-based Genuine Parts distributes automotive and industrial replacement parts and materials. As of Dec 31, 2021, the company had a network of more than 10,000 locations across 15 countries. GPC’s strategic acquisitions to improve product offerings and expand its geographical footprint are commendable.Strategic bolt-on acquisitions including Winparts, Rare Spares, PartsPoint and Alliance Automotive Group are adding to the top-line growth of GPC.

Genuine Parts’ upbeat 2022 view has sparked optimism. The company forecasts full-year adjusted earnings per share in the band of $7.70-$7.85, higher than the previous forecast of $7.45-$7.60. Free cash flow is projected in the band of $1.2-$1.4 billion, indicating a surge from $992 million generated in 2021. GPC currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2022 earnings and sales implies year-over-year growth of 13.6% and 12.2%, respectively.

LKQ: Illinois-based LKQ is one of the leading providers of replacement parts, components, and systems that are required to repair and maintain vehicles.LKQ’s strategic acquisitions are boosting its prospects. The buyouts of Elite Electronics, Green Bean Battery, Greenlight and Fabtech Industries have bolstered the firm’s product offerings. LKQ merged its subsidiary, Auto Kelly Bulgaria, with ElitKar, creating one of Bulgaria's leading distributors of automotive spare parts. The more recent acquisitions of Hanu and SeaWide Marine Distribution will further aid top-line growth.

LKQ forecasts organic revenue growth for parts and services in the range of 4.5-6.5% for 2022. Encouragingly, the company has updated its 2022 adjusted EPS projection to $3.80-$4.10 from the earlier $3.72-$4.02 per share. The stock currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2022 sales implies year-over-year growth of 2%.  The consensus mark for 2022 earnings has moved 4 cents north in the past 30 days to $3.95 per share.

Standard Motor: New York-based Standard Motor is one of the leading manufacturers, distributors, and marketers of premium automotive replacement parts for engine management and temperature control systems. Triple buyouts of Trombetta, Stabil and the particulate matter sensor business of Stoneridge (all closed in 2021) are expected to drive the top line of Standard Motor.The three acquisitions together are set to add $300 million to the firm’s annual sales.

The Zacks Consensus Estimate for SMP’s 2022 EPS and sales implies year-over-year growth of 2% and 6.4%, respectively. The consensus mark for 2022 earnings per share has been revised upward by 10 cents over the past 30 days to $4.54. Over the trailing four quarters, Standard Motor topped the consensus estimate for earnings on all occasions, the average surprise being 40.3%. SMP currently carries a Zacks Rank #3.

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

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