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4 Top Stocks to Tap the Thriving Auto Retail Industry
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The Zacks Auto Retail and Whole Sales industry is on the right track, thanks to high demand and sales of vehicles amid economic growth as well as easier credit conditions. While low inventory levels amid global chip crunch might act as a temporary headwind, the industry’s overall outlook appears promising.
Soaring popularity of electric vehicles (EVs) is spiking sales volumes. Also, rapid digitization has been paying off well and is set to further boost the prospects of industry participants like AutoNation (AN - Free Report) , Penske Automotive (PAG - Free Report) , Group 1 Automotive (GPI - Free Report) and Americas CarMart (CRMT - Free Report) .
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 sale of new and used vehicles, light trucks as well as auto parts, execution of repair and maintenance services along with arrangement of vehicle financing. The industry, being consumer cyclical, is dependent on business cycle 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.
4 Key Themes Shaping the Industry
Economic Growth to Boost Prospects: Thanks to unprecedented fiscal stimulus and stepped-up vaccination drive, the economy is set to soar, which bodes well for the Auto Retail industry. The World Bank projects U.S. economy to grow 6.8% in 2021. In April, the International Monetary Fund also raised U.S. GDP growth forecast for 2021 to 6.4% from 5.1% projected in January. Consumer spending is on the rise, with Americans being way more confident to make discretionary purchases. As such, rising demand for vehicles and easier credit conditions brighten the industry’s prospects.
Digitization in High Gear: The shift toward digital shopping has been growing at warp speed. 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 launch of a simple, secure and user-friendly online platform is aiding seamless end-to-end digitization of companies’ sales process. The race to invest vast sums in the e-commerce domain is gathering steam, propelling businesses to reach new heights.
EV Euphoria Bolstering Sales: Rising popularity of green vehicles amid climate concerns and favorable government policies is resulting in fundamental restructuring of the automotive market. Considering the changing dynamics, there has been a radical change in the business models of auto companies. With zero-emission vehicles getting popular by the day and EV charging infrastructure on a roll, consumers are now able to overcome range anxiety and actively looking to purchase eco-friendly cars, which augurs well for the industry’s growth.
Low Inventory Levels May Play Killjoy: While dealers are cheering buyers’ strong appetite for vehicles, it remains to be seen if the industry would be able to meet the mounting demand amid global chip crunch and falling inventories. As inventories are drying up fast amid strong sales and supply chain disruptions due to semiconductor shortage, consumers may have a hard time in finding new vehicles and specific models at dealerships, thereby resulting in a temporary hiccup for the industry.
Zacks Industry Rank Paints a Rosy Picture
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 #8, which places it in the top 3% 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 bright 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 a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are upbeat about this group’s earnings growth potential. Since Mar 31, the industry’s earnings estimates for 2021 have moved up 20.7%.
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 Outshines 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 skyrocketed 117.8% over this period compared with the sector and S&P 500’s growth of 72.5% and 38.5%, 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 8.64X compared with the S&P 500’s 17.44X and the sector’s 15.54X.
Over the past five years, the industry has traded as high as 10.07X, as low as 4.29X and at a median of 7.46X as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
Auto Retailers Worth Betting on
AutoNation: One of the leading auto retailers in the United States, AutoNation presently sports a Zacks Rank #1 (Strong Buy). Strong footprint, large dealer network, store expansion efforts, brand extension strategy and alliances bode well for AutoNation. It is targeting to operate below 65% selling, general & administrative expenses as a percentage of gross profit, indicating a decline from the 71-73% range over the last several years. Enhanced digital solutions of the firm and a strong balance sheet are other positives. The Zacks Consensus Estimate for 2021 earnings and sales indicates a year-over-year uptick of 16.1% and 42.6%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: AN
Americas CarMart: One of the largest used-car retailers in the United States, Americas CarMart operates its dealerships, primarily in small cities and at rural locations across the South-Central United States. Rising used car demand from mass-market brands is gathering momentum, which augurs well for the firm. The company’s revenues grew at a rate of 7.3% over the last five years, with acceleration to 11.3% in 2020. The Zacks Consensus Estimate for fiscal 2022 and 2023 revenues points to a year-over-year increase of 14% and 5%, respectively. In the last five years, the company’s earnings grew 45.8%. The company currently flaunts a Zacks Rank #1.
Price and Consensus: CRMT
Penske Automotive: Penske Automotive engages in the operation of automotive and commercial truck dealerships in the United States, Canada as well as 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 and sales points to year-over-year growth of 32.1% and 22.4%, respectively. Penske Automotive currently carries a Zacks Rank #2 (Buy).
Price and Consensus: PAG
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 Zacks Rank #2 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, is likely to aid Group 1’s long-term prospects. The Zacks Consensus Estimate for 2021 earnings and sales implies year-over-year growth of 17.4% and 15.8%, respectively.
Price and Consensus: GPI
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If you’re looking for big gains, there couldn’t be a better time to get in on a young industry primed to skyrocket from $17.7 billion back in 2019 to an expected $73.6 billion by 2027.
After a clean sweep of 6 election referendums in 5 states, pot is now legal in 36 states plus D.C. Federal legalization is expected soon and that could be a still greater bonanza for investors. Even before the latest wave of legalization, Zacks Investment Research has recommended pot stocks that have shot up as high as +285.9%.
You’re invited to check out Zacks’ Marijuana Moneymakers: An Investor’s Guide. It features a timely Watch List of pot stocks and ETFs with exceptional growth potential.
Image: Bigstock
4 Top Stocks to Tap the Thriving Auto Retail Industry
The Zacks Auto Retail and Whole Sales industry is on the right track, thanks to high demand and sales of vehicles amid economic growth as well as easier credit conditions. While low inventory levels amid global chip crunch might act as a temporary headwind, the industry’s overall outlook appears promising.
Soaring popularity of electric vehicles (EVs) is spiking sales volumes. Also, rapid digitization has been paying off well and is set to further boost the prospects of industry participants like AutoNation (AN - Free Report) , Penske Automotive (PAG - Free Report) , Group 1 Automotive (GPI - Free Report) and Americas CarMart (CRMT - Free Report) .
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 sale of new and used vehicles, light trucks as well as auto parts, execution of repair and maintenance services along with arrangement of vehicle financing. The industry, being consumer cyclical, is dependent on business cycle 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.
4 Key Themes Shaping the Industry
Economic Growth to Boost Prospects: Thanks to unprecedented fiscal stimulus and stepped-up vaccination drive, the economy is set to soar, which bodes well for the Auto Retail industry. The World Bank projects U.S. economy to grow 6.8% in 2021. In April, the International Monetary Fund also raised U.S. GDP growth forecast for 2021 to 6.4% from 5.1% projected in January. Consumer spending is on the rise, with Americans being way more confident to make discretionary purchases. As such, rising demand for vehicles and easier credit conditions brighten the industry’s prospects.
Digitization in High Gear: The shift toward digital shopping has been growing at warp speed. 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 launch of a simple, secure and user-friendly online platform is aiding seamless end-to-end digitization of companies’ sales process. The race to invest vast sums in the e-commerce domain is gathering steam, propelling businesses to reach new heights.
EV Euphoria Bolstering Sales: Rising popularity of green vehicles amid climate concerns and favorable government policies is resulting in fundamental restructuring of the automotive market. Considering the changing dynamics, there has been a radical change in the business models of auto companies. With zero-emission vehicles getting popular by the day and EV charging infrastructure on a roll, consumers are now able to overcome range anxiety and actively looking to purchase eco-friendly cars, which augurs well for the industry’s growth.
Low Inventory Levels May Play Killjoy: While dealers are cheering buyers’ strong appetite for vehicles, it remains to be seen if the industry would be able to meet the mounting demand amid global chip crunch and falling inventories. As inventories are drying up fast amid strong sales and supply chain disruptions due to semiconductor shortage, consumers may have a hard time in finding new vehicles and specific models at dealerships, thereby resulting in a temporary hiccup for the industry.
Zacks Industry Rank Paints a Rosy Picture
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 #8, which places it in the top 3% 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 bright 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 a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are upbeat about this group’s earnings growth potential. Since Mar 31, the industry’s earnings estimates for 2021 have moved up 20.7%.
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 Outshines 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 skyrocketed 117.8% over this period compared with the sector and S&P 500’s growth of 72.5% and 38.5%, 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 8.64X compared with the S&P 500’s 17.44X and the sector’s 15.54X.
Over the past five years, the industry has traded as high as 10.07X, as low as 4.29X and at a median of 7.46X as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
Auto Retailers Worth Betting on
AutoNation: One of the leading auto retailers in the United States, AutoNation presently sports a Zacks Rank #1 (Strong Buy). Strong footprint, large dealer network, store expansion efforts, brand extension strategy and alliances bode well for AutoNation. It is targeting to operate below 65% selling, general & administrative expenses as a percentage of gross profit, indicating a decline from the 71-73% range over the last several years. Enhanced digital solutions of the firm and a strong balance sheet are other positives. The Zacks Consensus Estimate for 2021 earnings and sales indicates a year-over-year uptick of 16.1% and 42.6%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: AN
Americas CarMart: One of the largest used-car retailers in the United States, Americas CarMart operates its dealerships, primarily in small cities and at rural locations across the South-Central United States. Rising used car demand from mass-market brands is gathering momentum, which augurs well for the firm. The company’s revenues grew at a rate of 7.3% over the last five years, with acceleration to 11.3% in 2020. The Zacks Consensus Estimate for fiscal 2022 and 2023 revenues points to a year-over-year increase of 14% and 5%, respectively. In the last five years, the company’s earnings grew 45.8%. The company currently flaunts a Zacks Rank #1.
Price and Consensus: CRMT
Penske Automotive: Penske Automotive engages in the operation of automotive and commercial truck dealerships in the United States, Canada as well as 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 and sales points to year-over-year growth of 32.1% and 22.4%, respectively. Penske Automotive currently carries a Zacks Rank #2 (Buy).
Price and Consensus: PAG
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 Zacks Rank #2 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, is likely to aid Group 1’s long-term prospects. The Zacks Consensus Estimate for 2021 earnings and sales implies year-over-year growth of 17.4% and 15.8%, respectively.
Price and Consensus: GPI
Time to Invest in Legal Marijuana
If you’re looking for big gains, there couldn’t be a better time to get in on a young industry primed to skyrocket from $17.7 billion back in 2019 to an expected $73.6 billion by 2027.
After a clean sweep of 6 election referendums in 5 states, pot is now legal in 36 states plus D.C. Federal legalization is expected soon and that could be a still greater bonanza for investors. Even before the latest wave of legalization, Zacks Investment Research has recommended pot stocks that have shot up as high as +285.9%.
You’re invited to check out Zacks’ Marijuana Moneymakers: An Investor’s Guide. It features a timely Watch List of pot stocks and ETFs with exceptional growth potential.
Today, Download Marijuana Moneymakers FREE >>