Despite inflation and high interest rates, U.S. consumer spending remained robust in 2024, fueling growth in the consumer discretionary sector, which outperformed the S&P 500. Solid economic growth and resilient demand drove this momentum. Likewise, in 2025, falling interest rates are likely to boost big-ticket spending on homes and autos, making the consumer discretionary sector promising.

Hence, investors should consider undervalued consumer discretionary stocks like LKQ Corporation (LKQ - Get Rating), Mohawk Industries, Inc. (MHK - Get Rating), and BorgWarner Inc. (BWA - Get Rating) as stealth value plays.

The consumer discretionary sector is thriving, driven by growth in retail nonessentials, home improvement, and leisure products, with e-commerce as a key catalyst. Auto suppliers, home improvement retailers, and EV-related companies show strong long-term growth potential. Factors such as aging housing stock, rising storm damage, and increasing EV adoption create sustainable investment opportunities.

Notably, performance in the consumer discretionary sector is driven by economic trends, job stability, and consumer sentiment. With jobs up 1.4%, unemployment at 4.1%, wages rising 4% against 2.7% inflation, and inflation-adjusted disposable income up 2.6%, consumer confidence and spending remain strong.

Furthermore, proposed government policies, such as lower corporate taxes or reduced regulations, could create favorable conditions for the sector. With this backdrop, let’s examine the fundamentals of the three consumer discretionary stocks.

LKQ Corporation (LKQ - Get Rating)

LKQ engages in the distribution of replacement parts, components, and systems used in the repair and maintenance of vehicles and specialty vehicle aftermarket products and accessories. It operates through four segments: Wholesale-North America, Europe, Specialty, and Self Service.

In terms of forward non-GAAP P/E, LKQ’s 11.23x is 34.7% lower than the 17.19x industry average. Its 8.98x forward EV/EBITDA is 14.7% lower than the 10.53x industry average. Likewise, its 11.75x forward EV/EBIT is 24% lower than the 15.46x industry average.

During the third quarter, which ended on September 30, 2024, LKQ’s revenue increased marginally year-over-year to $3.58 billion. Similarly, its gross margin grew slightly compared to the year-ago value, reaching $1.39 billion. Additionally, the company’s net income attributable to LKQ stockholders amounted to $191 million, or $0.73 per share.

Street expects LKQ’s EPS for the quarter ending March 31, 2025, to increase 3.3% year-over-year to $0.85. Its revenue for the quarter ending June 30, 2025, is expected to rise marginally year-over-year to $3.72 billion. Over the past month, the stock has gained 5.1% to close the last trading session at $38.46.

LKQ’s POWR Ratings reflect its robust outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

LKQ has a B grade for Value and Quality. It is ranked #21 out of 59 stocks in the A-rated Auto Parts industry. Beyond what we have stated above, we also have given LKQ grades for Growth, Momentum, Stability, and Sentiment. Get all the LKQ’s ratings here.

Mohawk Industries, Inc. (MHK - Get Rating)

MHK designs, manufactures, sources, distributes, and markets flooring products for residential and commercial remodeling, and new construction channels internationally. It operates through three segments: Global Ceramic, Flooring North America, and Flooring Rest of the World.

In terms of forward non-GAAP PEG, MHK’s 1.43x is 13.3% lower than the 1.65x industry average. Likewise, its 13.46x forward non-GAAP P/E is 21.2% lower than the 17.08x industry average. Also, its 0.96x forward EV/Sales is 27.2% lower than the 1.32x industry average.

For the fiscal fourth quarter that ended December 31, 2023, MHK’s adjusted net sales came in at $2.71 billion. Its adjusted operating income rose 3.3% from the year-ago value to $240.30 million. Also, the company’s adjusted net earnings and adjusted EPS attributable to MHK rose 5.9% and 6.6% over the prior-year quarter to $184 million and $2.90, respectively.

Analysts expect MHK’s EPS for the quarter ending June 30, 2025, to increase 9.1% year-over-year to $3.27, and its revenue for the same quarter is expected to increase marginally year-over-year to $2.83 billion. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 29.6% to close the last trading session at $129.27.

MHK’s POWR Ratings reflect solid prospects. It has an overall rating of B, translating to a Buy in our proprietary rating system.

It is ranked #16 out of 57 stocks in the B-rated Home Improvement & Goods industry. It has a B grade for Value and Momentum. To see MHK’s Growth, Stability, Sentiment, and Quality ratings, click here.

BorgWarner Inc. (BWA - Get Rating)

BWA and its subsidiaries provide solutions for combustion, hybrid, and electric vehicles worldwide. Their offerings include turbochargers, eBoosters, eTurbos, timing systems, emission systems, thermal systems, gasoline ignition technology, smart remote actuators, powertrain sensors, cabin heaters, battery modules and systems, battery heaters, and battery charging solutions.

On November 7, 2024, BorgWarner Inc. announced a quarterly cash dividend of $0.11 per share, payable on December 16, 2024, to stockholders of record as of December 2, 2024.

In terms of forward Price/Sales, BWA’s 0.50x is 48.8% lower than the 0.98x industry average. Its 7.16x forward EV/EBIT is 53.7% lower than the 15.47x industry average. Likewise, its 7.64x forward non-GAAP P/E is 55.3% lower than the 17.08x industry average.

BWA’s net sales for the fiscal third quarter that ended on September 30, 2024, were $3.45 billion, and its adjusted operating income was $350 million, up marginally from the prior-year quarter. For the same period, net earnings attributable to BWA were $234 million, representing a 368% year-over-year increase. The company’s adjusted EPS grew 11.2% from the prior-year quarter to $1.09.

For the quarter ended December 31, 2024, BWA’s EPS is expected to grow 5.9%  year-over-year to $0.95. Its revenue for the quarter ending June 30, 2025, is expected to rise 4.3% year-over-year to $3.76 billion. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 1.4% to close the last trading session at $32.29.

BWA’s POWR Ratings reflect its strong fundamentals. It has an overall rating of B, equating to a Buy in our proprietary rating system.

It has a B grade for Growth, Value, and Quality. Within the Auto Parts industry, it is ranked #10 out of 59 stocks. To access additional grades for BWA’s Momentum, Stability, and Sentiment, click here.

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LKQ shares were trading at $39.15 per share on Tuesday afternoon, up $0.69 (+1.79%). Year-to-date, LKQ has gained 6.53%, versus a 2.81% rise in the benchmark S&P 500 index during the same period.

About the Author: Abhishek Bhuyan

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments. More...

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