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Dim Near-Term Prospects for Auto Retail & Whole Sales Industry
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The automotive sector’s performance depends upon its retail and wholesale network. Through dealerships 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, the execution of repair and maintenance services, as well as arrangement of vehicle financing.
Let’s take a look at the industry’s three major themes:
The Auto Retail & Whole Sales industry, being consumer cyclical, is dependent on business cycle and economic conditions. As we know, consumer confidence had taken a beating in March and April amid coronavirus mayhem. Nonetheless, U.S. consumer confidence stabilized in May, with the index rising to 86.6 from a revised 85.7 in April. As the states are allowing businesses to reopen, the economy is gradually getting back on track and consumers’ sentiment is improving. However, until the pandemic cools down, consumers are likely to put off discretionary purchases like cars. Unemployment level rose to 14.7% in April and is expected to further increase in May, according to various economists. Purchasing power of many consumers are likely to get impacted and it is expected to take a while for them to start spending freely again on such big-ticket items.
As COVID-19 has stifled vehicle demand and dimmed earnings prospects, auto retail and wholesale companies are now slashing salaries and in some cases furloughing employees without pay. In a bid to preserve cash in the wake of coronavirus-led financial crisis, companies are resorting to various cost-containment measures. Dividend cuts, buyback suspension, employee layoffs, pay cuts and hiring freezes are becoming commonplace. Although these strategic actions might aid margins to a certain extent, these will not likely be enough to offset revenue declines from tumbling demand, given how gravely the virus outbreak is weighing on the industry.
The Auto Retail & Whole Sales industry is witnessing considerable changes in the operating environment. Amid temporary store closures and lower footfall in dealerships due the COVID-19 pandemic, companies are seeing new opportunities in e-commerce retailing. While digital automotive retailing currently accounts for a small percentage of car sales, there is incredible growth potential in the field on the back of increasing penetration of Internet services and rising adoption of online shopping. Several dealers are now investing in e-commerce tools as the outbreak is likely to lead to greater adoption of online services. Auto retailers are ramping up digital capabilities to make deals with customers and arrange for home deliveries of vehicles. While e-commerce efforts should compensate to some extent for lost store sales, escalated costs related to digital investments and competition may put pressure on margins.
Zacks Industry Rank Paints a Gloomy Picture
The Zacks Auto Retail & Whole Sales industry is a nine-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #221, which places it in the bottom 13% 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 bleak 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 position in the bottom 13% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates have moved 43% south.
Before we present a few Auto Retail & Wholesale 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 S&P 500 & Sector
The Zacks Auto Retail & Whole Sales industry has underperformed the Auto, Tires and Truck sector, as well as the Zacks S&P 500 composite over the past year.
The industry has inched down 0.5% over this period compared with the S&P 500 and sector’s rise of 7.4% and 11.7%, 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. 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 6.16X compared with the S&P 500’s 11.07X and the sector’s trailing12-month EV/EBITDA of 10.62X.
Over the past five years, the industry has traded as high as 9.71X, as low as 4.58X and at a median of 7.38X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
To Sum Up
Near-term prospects of the Auto Retail & Whole Sales industry are shadowed by disrupted supply chains, lesser production activities, store closures and lower demand for discretionary items owing to the coronavirus outbreak. Nonetheless, digital operations and stringent cost-cutting efforts should offer some respite to the companies.
None of the stocks in the industry has a Zacks Rank #1 (Strong Buy) or 2 (Buy). So we are presenting four stocks with a Zacks Rank #3 (Hold) that investors may choose to hold on to.You can see the complete list of today’s Zacks #1 Rank stocks here.
Group 1 Automotive (GPI - Free Report) :Texas-based Group 1 Automotive is one of the leading automotive retailers in the world. The company has an estimated long-term earnings growth rate of 5.5%.
Price & Consensus: GPI
Lithia Motors (LAD - Free Report) : Lithia Motors is one of the well-known retailers of new and used vehicles, and related services in the United States.The company has an estimated long-term earnings growth rate of 1.7%.
Price & Consensus: LAD
Sonic Automotive (SAH - Free Report) : Sonic Automotive is also one of the leading automotive retailers in the United States. The firm delivered positive earnings surprise in each of the trailing four quarters, with the average being 39.2%.
Price & Consensus: SAH
AutoNation (AN - Free Report) :The company is the largest automotive retailer in the United States and has an estimated long-term earnings growth rate of 3.6%.
Price & Consensus: AN
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.1% per year.
These 7 were selected because of their superior potential for immediate breakout.
Image: Bigstock
Dim Near-Term Prospects for Auto Retail & Whole Sales Industry
The automotive sector’s performance depends upon its retail and wholesale network. Through dealerships 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, the execution of repair and maintenance services, as well as arrangement of vehicle financing.
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Paints a Gloomy Picture
The Zacks Auto Retail & Whole Sales industry is a nine-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #221, which places it in the bottom 13% 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 bleak 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 position in the bottom 13% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates have moved 43% south.
Before we present a few Auto Retail & Wholesale 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 S&P 500 & Sector
The Zacks Auto Retail & Whole Sales industry has underperformed the Auto, Tires and Truck sector, as well as the Zacks S&P 500 composite over the past year.
The industry has inched down 0.5% over this period compared with the S&P 500 and sector’s rise of 7.4% and 11.7%, 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. 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 6.16X compared with the S&P 500’s 11.07X and the sector’s trailing12-month EV/EBITDA of 10.62X.
Over the past five years, the industry has traded as high as 9.71X, as low as 4.58X and at a median of 7.38X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
To Sum Up
Near-term prospects of the Auto Retail & Whole Sales industry are shadowed by disrupted supply chains, lesser production activities, store closures and lower demand for discretionary items owing to the coronavirus outbreak. Nonetheless, digital operations and stringent cost-cutting efforts should offer some respite to the companies.
None of the stocks in the industry has a Zacks Rank #1 (Strong Buy) or 2 (Buy). So we are presenting four stocks with a Zacks Rank #3 (Hold) that investors may choose to hold on to.You can see the complete list of today’s Zacks #1 Rank stocks here.
Group 1 Automotive (GPI - Free Report) :Texas-based Group 1 Automotive is one of the leading automotive retailers in the world. The company has an estimated long-term earnings growth rate of 5.5%.
Price & Consensus: GPI
Lithia Motors (LAD - Free Report) : Lithia Motors is one of the well-known retailers of new and used vehicles, and related services in the United States.The company has an estimated long-term earnings growth rate of 1.7%.
Price & Consensus: LAD
Sonic Automotive (SAH - Free Report) : Sonic Automotive is also one of the leading automotive retailers in the United States. The firm delivered positive earnings surprise in each of the trailing four quarters, with the average being 39.2%.
Price & Consensus: SAH
AutoNation (AN - Free Report) :The company is the largest automotive retailer in the United States and has an estimated long-term earnings growth rate of 3.6%.
Price & Consensus: AN
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.1% per year.
These 7 were selected because of their superior potential for immediate breakout.
See these time-sensitive tickers now >>