We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Auto Retail Industry Losing Steam: 2 Stocks That Hold Up Better
Read MoreHide Full Article
The Zacks Auto Retail and Whole Sales industry’s prospects look muted amid concerns of economic slowdown stemming from Fed’s aggressive stance to rein in stubborn inflation. With the industry being highly cyclical, much of the pent-up demand from the limited supply is gradually disappearing as high-interest rates eat away vehicle buyers' willingness and ability to purchase. Rising prices of new vehicles are likely to lead consumers to postpone their car purchases, with recessionary risks lurking around the corner. Meanwhile, falling used vehicle prices are hurting the industry participants’ margins. Two auto retailers, Penske Automotive (PAG - Free Report) and Group 1 Automotive (GPI - Free Report) , seem better positioned to navigate the challenges.
Industry Overview
The automotive sector’s performance depends on 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 the sale of new and used vehicles, light trucks as well as auto parts, execution of repair and maintenance services along with the arrangement of vehicle financing. The industry, being consumer cyclical, is dependent on business cycles and economic conditions. Consumers and businesses spend more on big-ticket items when they have higher disposable income. On the contrary, when income is tight, discretionary expenses are the first to be slashed. Importantly, the coronavirus pandemic has brought considerable changes in the operating environment, with the industry laying more emphasis on e-commerce retailing, and the trend is here to stay.
Key Themes Influencing the Industry
Economic Concerns to Cool Off Demand: The Auto Retail & Whole Sales industry, being consumer cyclical, is dependent on economic conditions. Risks of economic slowdown and even recession loom large amid high inflation and hawkish Fed. To rein in the stubborn inflation, the Fed became ultra-aggressive, cranking up borrowing rates repeatedly in 2022. Rates will rise further in 2023, and no cuts are expected till 2024. The FOMC has also lowered its GDP growth projection for 2023 from 1.2% to 0.5%. Consumers are gradually becoming apprehensive about buying cars in an uncertain economy. As a result, the demand for vehicles has already begun to cool off. While auto sales in 2022 fell to a decade low primarily owing to supply chain issues, this year, the industry is likely to suffer from macroeconomic challenges. The supply crunch is most likely to morph into a demand slowdown in 2023.
Rising New Vehicle Prices to Raise Affordability Issues: Per the Kelly Blue Book, the average selling price of new vehicles hit a record high of $48,681 in November 2022, beating the previous record high of $48,301 in August. TrueCar estimates average transaction prices to be up around 17% year over year in the fourth quarter of 2022. Increasing costs of vehicle financing are making monthly payments less affordable for less-affluent and subprime consumers. Per Cox Automotive, auto loan rates reached another 20-year high in November, with typical monthly payments up 1.8% to a fresh high of $762.With borrowing getting expensive and threats of a recession looming large, vehicle affordability is emerging as a pressing issue for the industry.
Falling Used Car Prices to Erode Margins: While rising new vehicle prices may lead consumers to put off the purchase of these high-ticket items, falling used vehicle prices are set to hurt the margins of industry participants. Used vehicle prices in the United States contracted 14.9% year over year last month, according to the Manheim used-vehicle price index (which tracks the prices of used vehicles sold at wholesale auctions). This marks the biggest-ever price drop. Retail prices of used vehicles are also falling. Per Cox Automotive, the average listing price of a used vehicle was $27,156 in November, a 2% decline year over year and the lowest since last spring. Analysts expect both retail and wholesale used car prices to keep falling, which is bad news for the industry participants.
Dealership Merger Mania on Fast Lane: A wave of consolidation is sweeping across the auto retail industry. The year 2021 was the biggest and most memorable year for dealership merger & acquisition (M&A) activities in decades. The pace of M&A deals among dealerships was brisk in 2022 as well. Large retailers have been actively focusing on expanding their footprint and gaining economies of scale. Even smaller dealer groups are seeking to add more stores that can provide a wider selection of vehicles at all price points and broaden their geographic customer base. These expansion efforts are bolstering the scalability, revenues and competitive advantage of auto retailers.
Digitization Ramp-Up is Here to Stay: Since the coronavirus outbreak, digitization has been in high gear, and the trend is here to stay. 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. Initiatives like ship-to-home next day, curbside pick-up option, and buy online, pick-up in stores options are picking pace, driving additional traffic to companies’ online sites. Enhanced digital solutions are providing shoppers with a truly comprehensive and personal experience.With digitization gathering steam, auto retail companies are poised to reach new heights.
Zacks Industry Rank Paints a Gloomy Picture
The Zacks Auto Retail & Whole Sales industry is an eight-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #234, which places it in the bottom 6% of around 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates grim 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 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a tepid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past six months, the industry’s earnings estimates for 2023 have declined around 8%.
Given the weak prospects, none of the industry participants has a Zacks Rank #1 (Strong Buy) or 2 (Buy). Before we present you with a couple of stocks that you may choose to hold on to, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Tops Sector and S&P 500
The Zacks Auto Retail & Whole Sales industry has outperformed the Zacks S&P 500 composite as well as the Auto, Tires and Truck sector over the past year. The industry has lost 3.8% over this period compared with the sector and S&P 500’s decline of 55.1% and 18.5%, respectively.
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.
On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 5.08X compared with the S&P 500’s 11.83X and the sector’s trailing 12-month EV/EBITDA of 11.66X.
Over the past five years, the industry has traded as high as 10.08X, as low as 4.28X and at a median of 6.85X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
2 Auto Retailers to Add to Your Watchlist
Penske: Penske engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. It has become the largest dealership group for Freightliner in North America with the Warner Truck Centers acquisition. Buyouts of Kansas City Freightliner, McCoy and Team Trucks Centers are boosting Penske’s top line. Last year, the company completed acquisitions and opened new dealerships representing more than $1.3 billion in annualized revenues. In 2022, PAG hiked its dividend payout four times.
Penske currently carries a Zacks Rank #3 (Hold) and has a Value Score of A. It pulled off an earnings beat in the last four quarters, with the average being 12.7%. The consensus mark for 2022 and 2023 EPS has moved north by 5 cents each over the past 60 days. Shares of PAG have gained 12.3% over the past six months, outperforming the industry’s growth of 3.4%.
Group 1: Another notable automotive retailer, Group 1 operates primarily in the United States and U.K. In 2021, GPI acquired Prime Automotive in the Northeastern United States and the Robinsons Group in the U.K., which diversified the company’s footprint. Group 1’s total expected annualized revenue acquired in 2022 was $940 million. The AcceleRide platform, Group 1’s online retailing initiative, is yielding positive results. The company increased its dividend 12 times in the past five years, with an annualized dividend growth rate of 9.73%.
Group 1 currently carries a Zacks Rank #3 and has a Value Score of A. It pulled off an earnings beat in the last four quarters, with the average being 10.3%. The consensus mark for 2022 and 2023 EPS has moved north by 78 cents and $1.99, respectively, over the past 90 days. Shares of GPI have gained 16.6% over the past six months, outperforming the industry’s growth of 3.4%.
Price and Consensus: GPI
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Auto Retail Industry Losing Steam: 2 Stocks That Hold Up Better
The Zacks Auto Retail and Whole Sales industry’s prospects look muted amid concerns of economic slowdown stemming from Fed’s aggressive stance to rein in stubborn inflation. With the industry being highly cyclical, much of the pent-up demand from the limited supply is gradually disappearing as high-interest rates eat away vehicle buyers' willingness and ability to purchase. Rising prices of new vehicles are likely to lead consumers to postpone their car purchases, with recessionary risks lurking around the corner. Meanwhile, falling used vehicle prices are hurting the industry participants’ margins. Two auto retailers, Penske Automotive (PAG - Free Report) and Group 1 Automotive (GPI - Free Report) , seem better positioned to navigate the challenges.
Industry Overview
The automotive sector’s performance depends on 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 the sale of new and used vehicles, light trucks as well as auto parts, execution of repair and maintenance services along with the arrangement of vehicle financing. The industry, being consumer cyclical, is dependent on business cycles and economic conditions. Consumers and businesses spend more on big-ticket items when they have higher disposable income. On the contrary, when income is tight, discretionary expenses are the first to be slashed. Importantly, the coronavirus pandemic has brought considerable changes in the operating environment, with the industry laying more emphasis on e-commerce retailing, and the trend is here to stay.
Key Themes Influencing the Industry
Economic Concerns to Cool Off Demand: The Auto Retail & Whole Sales industry, being consumer cyclical, is dependent on economic conditions. Risks of economic slowdown and even recession loom large amid high inflation and hawkish Fed. To rein in the stubborn inflation, the Fed became ultra-aggressive, cranking up borrowing rates repeatedly in 2022. Rates will rise further in 2023, and no cuts are expected till 2024. The FOMC has also lowered its GDP growth projection for 2023 from 1.2% to 0.5%. Consumers are gradually becoming apprehensive about buying cars in an uncertain economy. As a result, the demand for vehicles has already begun to cool off. While auto sales in 2022 fell to a decade low primarily owing to supply chain issues, this year, the industry is likely to suffer from macroeconomic challenges. The supply crunch is most likely to morph into a demand slowdown in 2023.
Rising New Vehicle Prices to Raise Affordability Issues: Per the Kelly Blue Book, the average selling price of new vehicles hit a record high of $48,681 in November 2022, beating the previous record high of $48,301 in August. TrueCar estimates average transaction prices to be up around 17% year over year in the fourth quarter of 2022. Increasing costs of vehicle financing are making monthly payments less affordable for less-affluent and subprime consumers. Per Cox Automotive, auto loan rates reached another 20-year high in November, with typical monthly payments up 1.8% to a fresh high of $762.With borrowing getting expensive and threats of a recession looming large, vehicle affordability is emerging as a pressing issue for the industry.
Falling Used Car Prices to Erode Margins: While rising new vehicle prices may lead consumers to put off the purchase of these high-ticket items, falling used vehicle prices are set to hurt the margins of industry participants. Used vehicle prices in the United States contracted 14.9% year over year last month, according to the Manheim used-vehicle price index (which tracks the prices of used vehicles sold at wholesale auctions). This marks the biggest-ever price drop. Retail prices of used vehicles are also falling. Per Cox Automotive, the average listing price of a used vehicle was $27,156 in November, a 2% decline year over year and the lowest since last spring. Analysts expect both retail and wholesale used car prices to keep falling, which is bad news for the industry participants.
Dealership Merger Mania on Fast Lane: A wave of consolidation is sweeping across the auto retail industry. The year 2021 was the biggest and most memorable year for dealership merger & acquisition (M&A) activities in decades. The pace of M&A deals among dealerships was brisk in 2022 as well. Large retailers have been actively focusing on expanding their footprint and gaining economies of scale. Even smaller dealer groups are seeking to add more stores that can provide a wider selection of vehicles at all price points and broaden their geographic customer base. These expansion efforts are bolstering the scalability, revenues and competitive advantage of auto retailers.
Digitization Ramp-Up is Here to Stay: Since the coronavirus outbreak, digitization has been in high gear, and the trend is here to stay. 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. Initiatives like ship-to-home next day, curbside pick-up option, and buy online, pick-up in stores options are picking pace, driving additional traffic to companies’ online sites. Enhanced digital solutions are providing shoppers with a truly comprehensive and personal experience.With digitization gathering steam, auto retail companies are poised to reach new heights.
Zacks Industry Rank Paints a Gloomy Picture
The Zacks Auto Retail & Whole Sales industry is an eight-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #234, which places it in the bottom 6% of around 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates grim 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 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a tepid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past six months, the industry’s earnings estimates for 2023 have declined around 8%.
Given the weak prospects, none of the industry participants has a Zacks Rank #1 (Strong Buy) or 2 (Buy). Before we present you with a couple of stocks that you may choose to hold on to, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Tops Sector and S&P 500
The Zacks Auto Retail & Whole Sales industry has outperformed the Zacks S&P 500 composite as well as the Auto, Tires and Truck sector over the past year. The industry has lost 3.8% over this period compared with the sector and S&P 500’s decline of 55.1% and 18.5%, respectively.
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.
On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 5.08X compared with the S&P 500’s 11.83X and the sector’s trailing 12-month EV/EBITDA of 11.66X.
Over the past five years, the industry has traded as high as 10.08X, as low as 4.28X and at a median of 6.85X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
2 Auto Retailers to Add to Your Watchlist
Penske: Penske engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. It has become the largest dealership group for Freightliner in North America with the Warner Truck Centers acquisition. Buyouts of Kansas City Freightliner, McCoy and Team Trucks Centers are boosting Penske’s top line. Last year, the company completed acquisitions and opened new dealerships representing more than $1.3 billion in annualized revenues. In 2022, PAG hiked its dividend payout four times.
Penske currently carries a Zacks Rank #3 (Hold) and has a Value Score of A. It pulled off an earnings beat in the last four quarters, with the average being 12.7%. The consensus mark for 2022 and 2023 EPS has moved north by 5 cents each over the past 60 days. Shares of PAG have gained 12.3% over the past six months, outperforming the industry’s growth of 3.4%.
You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
Price and Consensus: PAG
Group 1: Another notable automotive retailer, Group 1 operates primarily in the United States and U.K. In 2021, GPI acquired Prime Automotive in the Northeastern United States and the Robinsons Group in the U.K., which diversified the company’s footprint. Group 1’s total expected annualized revenue acquired in 2022 was $940 million. The AcceleRide platform, Group 1’s online retailing initiative, is yielding positive results. The company increased its dividend 12 times in the past five years, with an annualized dividend growth rate of 9.73%.
Group 1 currently carries a Zacks Rank #3 and has a Value Score of A. It pulled off an earnings beat in the last four quarters, with the average being 10.3%. The consensus mark for 2022 and 2023 EPS has moved north by 78 cents and $1.99, respectively, over the past 90 days. Shares of GPI have gained 16.6% over the past six months, outperforming the industry’s growth of 3.4%.
Price and Consensus: GPI