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5 Auto Retail Stocks Set to Offer Investors a Smooth Ride
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The Zacks Auto Retail and Whole Sales industry is thriving on the back of increasing e-commerce initiatives and cost-containment efforts amid coronavirus woes. While highly-priced new vehicles could deter debt-weary millennials from making big ticket purchases amid coronavirus-led downturn, the used car market is going strong and is likely to remain so.
Digital ramp up is fast emerging as the key to survival and enabling effective customer engagement. The above-mentioned factors are aiding industry players like Lithia Motors (LAD - Free Report) , AutoNation (AN - Free Report) , Penske Automotive (PAG - Free Report) , Sonic Automotive (SAH - Free Report) , and Group 1 Automotive (GPI - Free Report) .
About the Industry
The automotive's sector performance depends upon its retail and wholesale network. Through dealership and retail chains, companies in the Zacks Auto Retail and Whole Sales industry carry out several tasks. These include sale of new and used vehicles, light trucks and auto parts, execution of repair and maintenance services, along with arrangement of vehicle financing.
Key Factors Shaping the Fate of Auto Retail and Whole Sales Industry
Digitization Gets Into Gear: Post coronavirus-induced lockdowns in several cities, socially-distant digital sales have been accelerating. Auto companies have been looking for alternative ways to connect with car shoppers to sail through unprecedented times. The pandemic has certainly brought immense opportunities for digitization, laying emphasis on contactless deliveries. Several dealers are now investing in e-commerce tools as the outbreak is likely to lead to greater adoption of online services. Online traffic is on the rise, with auto retailers ramping up digital capabilities to make deals with customers and arrange for home deliveries of vehicles. The shift toward digital shopping has grown at warp speed amid the coronavirus pandemic and will continue even after the crisis.
Used Cars a Bright Spot: With social distancing becoming the new normal, people are trying their best to avoid public transportation. Ride sharing options are also not being considered safe by many. Private transportation is the need of the hour. Also, amid economic slowdown concerns, consumers are getting more inclined toward used vehicles rather than splurging on new cars. As such, sales of used vehicles have held up better than new cars. Most of the firms including Sonic Automotive, Lithia Motors and CarMax have started witnessing higher year-over-year used car sales. Used car demand from mass-market brands is expected to gather further momentum.
Cash Preservation in Focus: In a bid to preserve cash in the wake of coronavirus-led financial crisis, companies are resorting to various cost-containment measures and drawing down their credit lines. Dividend cuts, buyback suspension, employee layoffs, pay cuts and hiring freezes are becoming commonplace. These strategic actions are aiding margins and strengthening the balance sheet of firms. As cash is the king for any business, constructive measures to boost the firms’ liquidity in the face of rising global market uncertainty are paying off well.
Zacks Industry Rank Indicates Rosy Prospects
The Zacks Auto Retail & Whole Sales industry is a nine-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #2, which places it in the top 1% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Since Mar 31, 2020, the industry’s earnings estimates for 2020 have moved up 16.7%.
Before we present a few stocks that you may 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, Beats S&P 500
While the Zacks Auto Retail & Whole Sales industry has underperformed the Auto, Tires and Truck sector, it has marginally surpassed the Zacks S&P 500 composite over the past year.
The industry has increased 11.6% over this period compared with the S&P 500’s rise of 11%. In contrast, the industry has underperformed the sector’s rally of 49.8% in the said period.
One-Year Price Performance
Industry’s Current Valuation
Since automotive companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 7.88X compared with the S&P 500’s 14.24X and the sector’s trailing12-month EV/EBITDA of 15.99.
Over the past five years, the industry has traded as high as 9.82X, as low as 4.49X and at a median of 7.29X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
5 Stocks to Bet on in the Flourishing Auto Retail Industry
Amid the above-mentioned tailwinds, all the industry participants either carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). Below we have highlighted five stocks sporting a Zacks Rank #1 that are positioned to fetch solid returns. You can see the complete list of today’s Zacks #1 Rank stocks here.
Lithia Motors: Lithia is one of the leading automotive retailers of new and used vehicles, and related services in the United States. The firm’s diversified product mix and multiple streams of income reduce the firm’s risk profile. Lithia’s omni-channel marketing and enhanced digital solutions are boosting its profitability and market presence. The recent buyout of John Eagle dealerships is likely to add $1.1 billion to the auto retailer’s annualized revenues. The Zacks Consensus Estimate for fiscal 2020 earnings points to year-over-year growth of 17.5%.
Price and Consensus: LAD
AutoNation: Headquartered in Delaware, AutoNation is the largest automotive retailer in the United States. Strong footprint, large dealer network and store expansion efforts, along with brand extension strategy and alliances bode well for AutoNation. AutoNation is targeting to operate below 69% SG&A as a percentage of gross profit, indicating a decline from its 71-73% range over the last several years. The Zacks Consensus Estimate for fiscal 2020 earnings points to year-over-year growth of 20%.
Price and Consensus: AN
Penske Automotive: Penske Automotive engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. The company is anticipated to benefit from acquisitions or opening of dealerships in U.S. and European markets. The firm has become the largest dealership group for Freightliner in North America with the acquisition of Warner Truck Centers. The Zacks Consensus Estimate for fiscal 2021 earnings points to year-over-year growth of 35%.
Price and Consensus: PAG
Sonic Automotive: One of the noteworthy auto retailers, Sonic engages in selling new and used cars and light trucks, as well as offers warranties, service contracts, vehicle financing and insurance. Sonic’s used vehicle unit, EchoPark is expected to boost the firm’s profitability. Strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform and user interface bodes well for Sonic. This digital retailing partnership is expected to speed up the firm’s EchoPark expansion plans. The Zacks Consensus Estimate for fiscal 2020 earnings points to year-over-year growth of 29.8%.
Price and Consensus: SAH
Group 1 Automotive: Group 1 Automotive owns and operates automobile dealerships. In addition to selling new and used cars as well as light trucks, the firm provides maintenance/repair along with other related services.The company’s omni-channel efforts to boost sales bode well. Its digital efforts focused on online customer scheduling-appointment system are also enhancing customer experience. The AcceleRide platform, its online retailing initiative that is active at all of the firm’s U.S. dealerships, is likely to aid Group 1’s long-term prospects. The Zacks Consensus Estimate for fiscal 2020 earnings points to year-over-year growth of 13.7%.
Price and Consensus: GPI
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.
Image: Shutterstock
5 Auto Retail Stocks Set to Offer Investors a Smooth Ride
The Zacks Auto Retail and Whole Sales industry is thriving on the back of increasing e-commerce initiatives and cost-containment efforts amid coronavirus woes. While highly-priced new vehicles could deter debt-weary millennials from making big ticket purchases amid coronavirus-led downturn, the used car market is going strong and is likely to remain so.
Digital ramp up is fast emerging as the key to survival and enabling effective customer engagement. The above-mentioned factors are aiding industry players like Lithia Motors (LAD - Free Report) , AutoNation (AN - Free Report) , Penske Automotive (PAG - Free Report) , Sonic Automotive (SAH - Free Report) , and Group 1 Automotive (GPI - Free Report) .
About the Industry
The automotive's sector performance depends upon its retail and wholesale network. Through dealership and retail chains, companies in the Zacks Auto Retail and Whole Sales industry carry out several tasks. These include sale of new and used vehicles, light trucks and auto parts, execution of repair and maintenance services, along with arrangement of vehicle financing.
Key Factors Shaping the Fate of Auto Retail and Whole Sales Industry
Digitization Gets Into Gear: Post coronavirus-induced lockdowns in several cities, socially-distant digital sales have been accelerating. Auto companies have been looking for alternative ways to connect with car shoppers to sail through unprecedented times. The pandemic has certainly brought immense opportunities for digitization, laying emphasis on contactless deliveries. Several dealers are now investing in e-commerce tools as the outbreak is likely to lead to greater adoption of online services. Online traffic is on the rise, with auto retailers ramping up digital capabilities to make deals with customers and arrange for home deliveries of vehicles. The shift toward digital shopping has grown at warp speed amid the coronavirus pandemic and will continue even after the crisis.
Used Cars a Bright Spot: With social distancing becoming the new normal, people are trying their best to avoid public transportation. Ride sharing options are also not being considered safe by many. Private transportation is the need of the hour. Also, amid economic slowdown concerns, consumers are getting more inclined toward used vehicles rather than splurging on new cars. As such, sales of used vehicles have held up better than new cars. Most of the firms including Sonic Automotive, Lithia Motors and CarMax have started witnessing higher year-over-year used car sales. Used car demand from mass-market brands is expected to gather further momentum.
Cash Preservation in Focus: In a bid to preserve cash in the wake of coronavirus-led financial crisis, companies are resorting to various cost-containment measures and drawing down their credit lines. Dividend cuts, buyback suspension, employee layoffs, pay cuts and hiring freezes are becoming commonplace. These strategic actions are aiding margins and strengthening the balance sheet of firms. As cash is the king for any business, constructive measures to boost the firms’ liquidity in the face of rising global market uncertainty are paying off well.
Zacks Industry Rank Indicates Rosy Prospects
The Zacks Auto Retail & Whole Sales industry is a nine-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #2, which places it in the top 1% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Since Mar 31, 2020, the industry’s earnings estimates for 2020 have moved up 16.7%.
Before we present a few stocks that you may 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, Beats S&P 500
While the Zacks Auto Retail & Whole Sales industry has underperformed the Auto, Tires and Truck sector, it has marginally surpassed the Zacks S&P 500 composite over the past year.
The industry has increased 11.6% over this period compared with the S&P 500’s rise of 11%. In contrast, the industry has underperformed the sector’s rally of 49.8% in the said period.
One-Year Price Performance
Industry’s Current Valuation
Since automotive companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 7.88X compared with the S&P 500’s 14.24X and the sector’s trailing12-month EV/EBITDA of 15.99.
Over the past five years, the industry has traded as high as 9.82X, as low as 4.49X and at a median of 7.29X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
5 Stocks to Bet on in the Flourishing Auto Retail Industry
Amid the above-mentioned tailwinds, all the industry participants either carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). Below we have highlighted five stocks sporting a Zacks Rank #1 that are positioned to fetch solid returns. You can see the complete list of today’s Zacks #1 Rank stocks here.
Lithia Motors: Lithia is one of the leading automotive retailers of new and used vehicles, and related services in the United States. The firm’s diversified product mix and multiple streams of income reduce the firm’s risk profile. Lithia’s omni-channel marketing and enhanced digital solutions are boosting its profitability and market presence. The recent buyout of John Eagle dealerships is likely to add $1.1 billion to the auto retailer’s annualized revenues. The Zacks Consensus Estimate for fiscal 2020 earnings points to year-over-year growth of 17.5%.
Price and Consensus: LAD
AutoNation: Headquartered in Delaware, AutoNation is the largest automotive retailer in the United States. Strong footprint, large dealer network and store expansion efforts, along with brand extension strategy and alliances bode well for AutoNation. AutoNation is targeting to operate below 69% SG&A as a percentage of gross profit, indicating a decline from its 71-73% range over the last several years. The Zacks Consensus Estimate for fiscal 2020 earnings points to year-over-year growth of 20%.
Price and Consensus: AN
Penske Automotive: Penske Automotive engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. The company is anticipated to benefit from acquisitions or opening of dealerships in U.S. and European markets. The firm has become the largest dealership group for Freightliner in North America with the acquisition of Warner Truck Centers. The Zacks Consensus Estimate for fiscal 2021 earnings points to year-over-year growth of 35%.
Price and Consensus: PAG
Sonic Automotive: One of the noteworthy auto retailers, Sonic engages in selling new and used cars and light trucks, as well as offers warranties, service contracts, vehicle financing and insurance. Sonic’s used vehicle unit, EchoPark is expected to boost the firm’s profitability. Strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform and user interface bodes well for Sonic. This digital retailing partnership is expected to speed up the firm’s EchoPark expansion plans. The Zacks Consensus Estimate for fiscal 2020 earnings points to year-over-year growth of 29.8%.
Price and Consensus: SAH
Group 1 Automotive: Group 1 Automotive owns and operates automobile dealerships. In addition to selling new and used cars as well as light trucks, the firm provides maintenance/repair along with other related services.The company’s omni-channel efforts to boost sales bode well. Its digital efforts focused on online customer scheduling-appointment system are also enhancing customer experience. The AcceleRide platform, its online retailing initiative that is active at all of the firm’s U.S. dealerships, is likely to aid Group 1’s long-term prospects. The Zacks Consensus Estimate for fiscal 2020 earnings points to year-over-year growth of 13.7%.
Price and Consensus: GPI
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.
Click here for the 6 trades >>