Best OEM and Auto Parts Stocks for 2022

Auto parts stocks offer appeal to all types of investors, from aggressive investors looking to invest in futuristic technologies like electric vehicles (EVs) and self-driving cars to risk-averse investors worried about a recession. With that in mind, let's take a closer look at the industry's leading stocks.

Auto Parts Industry Stocks

Auto Parts Industry Stocks

Thematically, there are three overlapping schools of thought when it comes to investing in the automotive industry.

• Stocks that benefit from the aftermarket and exchange markets.
• Original equipment manufacturer (OEM) parts suppliers and companies benefiting from the rise in light vehicle production (LVP), which includes cars, sport utility vehicles, vans and other light commercial vehicles.
• Many OEM suppliers, essentially a subset of the first group, are looking to increase their content per vehicle (CPV) through technological developments and changes in demand. CPV refers to the value of a company's product in a vehicle.

While these three bullet groupings are somewhat arbitrary and many companies fall into two or all three groups, this model still provides a useful guide for investing in the automotive and transportation industry.

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1. LKQ Corporation

LKQ Co., Ltd. is a major player in the aftermarket and replacement parts market. This market remains relatively stable with growth prospects driven by mileage of light vehicles. Higher mileage means more vehicle crashes and more wear and tear on vehicles. This is all good news for LKQ.

The company has a global presence and is a leader in North America and Europe, and management plans to leverage the scale it has built through about 300 acquisitions to gain market share by stocking more auto parts than its competitors.

2. Goodyear

Tire manufacturer Goodyear tends to get three-quarters of its sales from the replacement market rather than OEM, and when investing in the aftermarket, the key is to make sure your company is growing by capturing market share.

Management will launch its “Goodyear Forward” initiative in the second half of 2023, which aims to reduce costs (including footprint and factory rationalization) by $1 billion by the end of 2025 and improve operating margins by $350 million in 2024.

This is exactly the kind of initiative investors would expect in an environment of sluggish revenue growth.

3. O'Reilly Automotive

Given the size of the aftermarket, a lot can be done in this space in less obvious ways. The key metrics to look at here are mileage and the average age of the vehicle fleet. As mentioned before, the higher the mileage, the more vehicles are serviced, and older cars tend to need more servicing.

That's good news for auto parts retailers like O'Reilly Automotive. AutoZone (Azo 0.82%), and Advance Auto Parts (Australian Airlines -2.68%). These are an exciting and unusual collection of stocks that are often seen as recession-proof. The reason is that during recessions, consumers tend to delay new-car purchases and hold on to their older vehicles for longer. The auto industry found itself in just such an environment when interest rates rose and new-car sales slowed.

O'Reilly Automotive is best in its class due to its relatively strong exposure to the high-growth Do-It-For-Me (DIFM) market, which is seen as having greater growth potential as vehicles become more complex. O'Reilly also has a strong track record of ensuring timely delivery of parts, which is a big plus for DIFM customers.

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4. Snap-on

Snap-on is a global supplier of tools, diagnostic equipment and information systems to dealerships and auto repair shops. In fact, nearly two-thirds of Snap-on's sales are to auto repair shops and auto technicians.

As a result, demand for Snap-on's products tends to be driven by the volume of vehicles serviced and the increasing complexity of the vehicle systems incorporated within them. Additionally, the average U.S. light vehicle model year is increasing, which may continue to drive increased service demand.

5. Axalta Coating System

Another low-key way to get into the auto parts market is to invest in paint and coatings companies. Investors should keep an eye on Axalta Coating Systems, as the automotive market accounts for nearly three-quarters of the company's sales, and the refinish market is its highest-margin business.

Axalta offers investors a way to capitalize on both the aftermarket (refinish) and OEM markets, and given that cars need coatings whether they're combustion, hybrid or electric, Axalta offers a way to capitalize regardless of industry changes – a surefire way to invest across a variety of market conditions.

6. Aptiv

Major OEM parts manufacturers listed in the US are Magna International (MGA -3.66%), Lear Corporation (Lee -4.0%), Aptiv, BorgWarner, Autoliv, and others.

The main difference between OEM stocks and aftermarket stocks is that investors in OEM suppliers need to track light vehicle production numbers. Auto production numbers are an important metric to track because higher production numbers usually mean higher profits.

While the OEM market has a smaller number of customers (large automakers), the aftermarket tends to have a larger number of customers: Aptiv's customers, for example, include 23 of the top 25 automotive OEMs.

As a result, OEM supply contracts are almost always highly competitive. Suppliers have close relationships with manufacturers, both in terms of production plants and product development. Ultimately, the goal for OEM suppliers is to win the contract and benefit from increased LVP, which in turn increases CPV.

Aptiv plans to do that by winning the autonomous vehicle market — it's a leading provider of the architecture needed for self-driving cars — so the stock is both a technology investment and a way to capitalize on increasing OEM production.

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7. Autoliv

Autoliv's long-term sales growth is expected to be mid-single digit, while LVP's is expected to be low single digit. Growth is driven by the development of safety technologies and the industry introduction of airbags and seat belts. The company accounts for over 40% of the global market for passive safety, providing investors with the opportunity to profit from rising global automotive production and increased awareness of automotive safety.

8. BorgWarner

BorgWarner provides drivetrain and powertrain solutions to the internal combustion engine (ICE) market. However, as vehicle sales and production shift to hybrids and EVs, BorgWarner is investing in those propulsion systems and has made a number of acquisitions in the electrification space. For example, BorgWarner acquired Delphi Technologies (power electronics) in 2020 to strengthen its CPV for electric light vehicles.

ICE vehicles aren't going to disappear overnight, so BorgWarner and others can generate revenue from the ICE market for years to come. Still, auto OEM suppliers will need to adapt to the reality of a long-term transition to hybrids and EVs.

9. Gentex

Investors looking for a relatively safe tech investment might like Gentex, the digital vision and dimming mirror technology company that is by far the leading supplier of auto-dimming rearview mirrors to the automotive industry, with Magna a distant second.

Switching mirrors tend to be a premium option in vehicles, and Gentex management believes its revenues will increase as more automakers adopt switchable mirrors as an option. Additionally, as customer demand for advanced technology in vehicles increases, Gentex sees growth opportunities through expanding sales of its full display mirrors and camera systems.

Related Investment Topics

Related Investment Topics

Is this an area to invest in?

Is this an area to invest in?

The auto parts industry offers something for every investor, from high-risk, high-reward technology investments to balanced-risk options like Gentex and BorgWarner, as well as recession-proof options like auto parts retailers.

If you have a preference for a certain risk or have strong beliefs about the direction of the auto industry, you'll find attractive stocks on this list. If you're investing in OEM parts stocks, pay attention to industry forecasts for LPV and how auto suppliers plan to increase CPV. For the aftermarket, it's important to track mileage and how companies are competing in their end markets.