3 Auto Equipment Stocks Positioned for Growth in a Tough Market

The Zacks Automotive - Original Equipment industry faces a challenging but evolving backdrop. Vehicle demand is likely to cool in 2026 as high interest rates, elevated car prices, and tighter household budgets continue to weigh on affordability. At the same time, automakers are redesigning vehicles around electrification, software and advanced safety, which is changing the mix of components suppliers need to deliver. While this creates new growth opportunities, it also comes with higher R&D and manufacturing costs. Adding to the pressure, tariffs and trade uncertainty are pushing suppliers to localize production, favoring larger players with scale, strong execution and regional manufacturing footprints.

Despite a mixed industry backdrop, select industry players such as Modine Manufacturing MOD, Allison Transmission ALSN and Westport Fuel Systems WPRT are positioned to benefit from exposure to data center cooling, defense demand and alternative fuel adoption.

Industry Overview

The Zacks Automotive - Original Equipment Industry comprises companies that design, engineer, and manufacture components and systems for vehicle manufacturers. These products span powertrain, driveline, metal forming, safety, and structural technologies supporting electric, hybrid, and internal combustion vehicles. OEM suppliers focus on improving vehicle safety, performance, efficiency, and cost competitiveness while meeting increasingly stringent regulatory and emissions standards. The industry primarily serves global automotive manufacturers, with demand closely tied to vehicle production volumes and model mix.

Factors to Shape the Industry Dynamics

Slowing Sales and Affordability Pressures: U.S. vehicle sales are expected to moderate in 2026 as affordability challenges persist. Cox Automotive projects total new vehicle sales of about 15.8 million units, reflecting a 2.4% year-over-year decline. High interest rates, fewer manufacturer incentives and tighter household budgets are weighing on demand. At the same time, vehicle prices remain elevated, with the average new car transaction price near $50,000, and financing costs consuming a larger share of household income, limiting buyer activity.This does not augur well for auto equipment manufacturers, whose performance is closely tied to vehicle sales.

Technological Innovation: The auto equipment industry is being reshaped by the transition toward electric, hybrid, and increasingly software-defined vehicles. As automakers redesign platforms, suppliers face growing pressure to deliver lightweight structures, EV-specific driveline components, advanced safety systems, and integrated electronics. While full vehicle autonomy remains a longer-dated opportunity, the push toward electrification and advanced driver assistance is already altering component mix and supplier positioning. These shifts favor companies with strong engineering capabilities and the ability to align product portfolios with evolving vehicle architectures.

Cost Management is Key: Technological advancement brings higher cost intensity. Suppliers are facing rising expenses related to R&D, skilled labor, and the retooling of manufacturing lines to support new platforms and materials. Adding new features and meeting evolving performance standards often comes with a high upfront investment. In this environment, operational efficiency, disciplined capital allocation, and supply chain optimization are critical. Suppliers that can manage costs effectively while supporting innovation are better positioned to protect margins through the cycle.

Tariff-Induced Cost Pressures: Trade policy and tariffs remain an important factor shaping sourcing and manufacturing decisions within the U.S. auto equipment industry. The United States has imposed 25% Section 232 tariffs on certain imported automobile parts, including engines, transmissions, and electrical components. Tariff policies have increased cost volatility and encouraged automakers to push suppliers toward greater regional localization. While localization can reduce long-term tariff exposure and supply chain risk, it also raises capital requirements and execution risk. Suppliers with established regional manufacturing footprints are better positioned to navigate these shifts than smaller or more concentrated peers.

Zacks Industry Rank Isn't Solid

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 39% of more than 240 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates mixed to dull 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 losing confidence about this group’s earnings growth potential.Over the past year, the industry’s earnings estimates for the current year have declined 15.5%.

Before we present a few stocks that you may still want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags Sector and S&P 500

The Zacks Automotive - Original Equipment Industry has underperformed the S&P 500 and its sector over the past year. The industry has lost 3.5% over this period against the sector and the S&P 500’s growth of 30% and 17%, respectively.

One-Year Price Performance

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 16.14X compared with the S&P 500’s 17.2X and the sector’s 28.74X.

Over the past five years, the industry has traded as high as 22.18X and as low as 7.94X, with the median being 14.30X, as the chart below shows.

EV/EBITDA Ratio (Past 5 Years)

3 Stocks Worth Buying

Modine is a diversified global leader in thermal management technologies, with growing exposure to HVAC and data center end markets. The company’s Climate Solutions segment is emerging as a key growth engine, supported by the 2025 acquisitions of AbsolutAire, L.B. White and Climate by Design International.  As Modine integrates these businesses, management is applying its 80/20 operational discipline to improve margins, optimize capacity utilization and streamline operations. Execution has been strong, particularly in data center cooling, where capacity expansion remains on track. New production lines drove a 31% sequential increase in data center sales in fiscal third-quarter 2026 versus the prior quarter.

The momentum has carried into early fiscal fourth quarter, prompting management to raise its outlook for both revenues and adjusted EBITDA. Modine now expects data center revenues to grow more than 70% year over year, and has lifted its multi-year growth outlook to 50–70% annually over the next two years, positioning the company well ahead of its $2 billion revenue target for fiscal 2028.

Modine currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for MOD’s fiscal 2026 and 2026 EPS implies year-over-year growth of 18% and 39%, respectively.

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

Price & Consensus: MOD

Allison Transmission makes fully automatic transmissions for medium- and heavy-duty commercial trucks and U.S. defense vehicles.The company is well-positioned to benefit from rising global defense budgets. Its 3040MX platform is emerging as a key growth driver. It was selected for India’s FICV program, a $100 million+ opportunity over 20 years. The company also secured a new contract to supply 3040MX cross-drive transmissions for Poland’s Infantry Fighting Vehicle program. Allison’s eGen Power portfolio, comprising 100S, 100D, 130S, 85S and 130D e-axles, demonstrates its ability to adapt to the changing dynamics of the auto industry. In particular, the eGen Flex portfolio and the eGen Force portfolio are driving Allison’s prospects. 

International expansion represents a major long-term growth opportunity. The acquisition of Dana Off-Highway Drive & Motion Systems Business, completed in January 2026, will add a broader global footprint and open access to additional customers and markets.Allison is strengthening OEM relationships, expanding local engagement, and improving regional support capabilities, including new China production capacity that enhances competitiveness in Asia.

Allison Transmission currently sports a Zacks Rank #1. The Zacks Consensus Estimate for ALSN’s 2026 revenues and EPS implies year-over-year growth of 89% and 26%, respectively.

Price & Consensus: ALSN

Westport is a developer, manufacturer and supplier of advanced alternative fuel systems and components. WPRT’s joint venture with Volvo— Cespira— is strengthening itsrole in low- and net-zero carbon transportation, focusing on markets where HPDI systems provide clear economic benefits. HPDI fuel systems are already in use across Europe, India, South America, Africa, and East Asia. The company is also streamlining its operations through strategic divestitures, including the sale of its light-duty business, to sharpenfocus on HPDI technology and its high-pressure controls and systems business, areas with the strongest growth potential. 

Westport has begun production at two new sites—an expanded R&D and manufacturing facility in Cambridge and a hydrogen Innovation and manufacturing center in Changzhou. The facilities will support Westport’s GFI fuel systems and advance its hydrogen, CNG and RNG strategies. Initial customer shipments began in December 2025, with capacity ramping through the first quarter of 2026, strengthening Westport’s position in China’s fast-growing hydrogen commercial vehicle market.

Westport currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for WPRT’s 2026 bottom line implies a year-over-year improvement of 66%.

Price & Consensus: WPRT

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Modine Manufacturing Company (MOD): Free Stock Analysis Report
 
Westport Fuel Systems Inc. (WPRT): Free Stock Analysis Report
 
Allison Transmission Holdings, Inc. (ALSN): Free Stock Analysis Report

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

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