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Forget Carvana (CVNA), Focus on These 3 Auto Retailers Instead
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Carvana (CVNA - Free Report) is traversing rough waters as is evident from its share price decline of 91.7% so far this year. Shares of the used car e-retailer hit a 52-week low of $18.81 on Friday, before closing the session at $19.27. Friday’s decline of about 9% came amid a wider market selloff.
September’s job report was out on Friday. Employment Situation report came in better than expected with 263,000 new jobs created in September versus the consensus for 250,000. With jobs still hot, it seems that the aggressive rate hikes so far have not had much of an impact on slowing down the economy (and thus inflation) and that the Fed will need to keep jacking up rates.
Well, amid rising interest rates and economic uncertainty, the entire auto sector is under pressure. But Carvana has suffered a rather massive blow owing to its weak financials, escalating expenses and management’s gloomy outlook. Now, the company doesn’t expect to generate positive EBITDA until next year. Amid the challenges, Carvana currently carries a Zacks Rank #4 (Sell).
While we delve into what’s ailing Carvana, we would also highlight why a few auto retailers like Sonic Automotive (SAH - Free Report) , Group 1 Automotive (GPI - Free Report) and AutoNation (AN - Free Report) still look promising despite the headwinds grappling the broader auto market.
Carvana in Crisis
Since Carvana went public in 2017, it has not yet turned an annual profit. In fact, its net loss has mostly been widening. Net loss incurred in 2017, 2018, 2019 and 2020 was $164.3 million, $254.7 million, $364.6 million and $462.2 million, respectively. While the second quarter of 2021 marked the first positive net income quarter for the company, for full-year 2021, the company again incurred a net loss of $287 million. In both the first and the second quarters of 2022, the firm incurred a wider-than-expected loss. Amid the firm’s persistently rising capital investments to expand the business, Carvana is not likely to generate net annual profit this year as well.
The economic slowdown and rising interest rates are only adding to the woes. With the cost of vehicle financing increasing and recession threats looming, customers are likely to put such discretionary expenses on the back burner, which may hurt sales. Early this month, CVNA’s close peer CarMax missed earnings expectations amid a decline in the number of vehicles sold.
It should be noted that the used car market is gradually slowing down. Both the Manheim Used Vehicle Value Index and non-seasonally adjusted prices declined year over year in September. With wholesale used car prices starting to recede as the market cools, retail prices could be next to fall. If the demand for vehicles doesn’t hold up well, falling used car prices will severely weigh on gross margins.
In light of the uncertain macro environment and inflationary concerns, Carvana has also withdrawn its 2022 outlook. Discouragingly, the company has pushed back the GPU expectation of over $4,000 to 2023. Also, its forecast of achieving EBITDA breakeven in the last three quarters of 2022 combined has now been pushed back amid broader industry challenges and macroeconomic headwinds.
Investors believe that cash is king in the current environment of high inflation, rising rates, and an economic slowdown. But Carvana’s stretched balance sheet is a big concern. As of Jun 30, 2022, Carvana’s long-term debt rose to $6,605 million from $3,208 million as of 2021-end. Its debt-to-capital ratio stands at 0.90 compared with the industry’s 0.27. Elevated leverage, both in absolute and relative terms, restricts the firm’s flexibility to tap into growth opportunities. The firm’s debt is also quite high compared with cash and cash equivalents of $1,047 million. Its cash ratio is just 0.5.
Carvana has been bearing the brunt of escalating selling, general and administration (SG&A) expenses since its inception and the trend is likely to continue. SG&A costs amounted to $786.7 million, $1,126 million and $2,033 million in 2019, 2020 and 2021, respectively. In the last reported quarter, SG&A flared up 53.4% year over year. Amid high capex and other expenses, the firm hasn’t recorded positive free cash flow.
Strong liquidly profile and positive free cash flows become all the more important amid uncertainties in the global economy, market disruptions and dislocations. With Carvana constantly incurring losses and generating negative cash flow, you should stay away from the stock. With the stock 94% off its 52-week high, if you think it represents a buying opportunity, it’s not. Unfortunately for Carvana and its shareholders, the stock looks more like a value trap, even at current levels.
It should also be noted that Carvana has a high beta of 2.7. With the market sailing through a historically-volatile year, a high beta stock is perceived as riskier as it is more susceptible to the market’s moves.
The Zacks Consensus Estimate for CVNA’s 2022 bottom line is pegged at a loss of $8.90 a share, implying a year-over-year deterioration of 446%. The consensus mark for loss has widened 51 cents in the past seven days.
3 Auto Retailers to Add to Your Watchlist
While the aforementioned factors have made Carvana a risky pick, not all industry players have been losing ground. A few have managed to maintain a firm footing on the back of effective strategies, cost-containment efforts, strategic acquisitions and diversification. These strategies have been aiding them to counter the sector’s weakness effectively. We present three stocks from the auto retail space that should be on your radar for long-term gains.
Sonic: Sonic is committed to optimizing its Franchised Dealership business, both through organic growth initiatives and strategic acquisitions. The buyout of RFJ Auto Partners has substantially boosted Sonic’s portfolio and geographical footprint and has catapulted the company into the top-five biggest dealership groups in the United States.Its strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform and user interface bode well for Sonic. SAH is likely to gain from strong organic growth fueled by its EchoPark unit expansion. The company’s commitment to actively pursue capital deployment strategies to boost shareholder value through dividend and share repurchase programs is also praiseworthy.
The company currently carries a Zacks Rank #3 (Hold) and has a Value Score of A. The Zacks Consensus Estimate for SAH’s 2022 earnings per share and sales implies year-over-year growth of 17.5% and 24.4%, respectively.
Group 1: Group 1's diversified product mix and multiple streams of income reduce its risk profile. GPI’s acquisitions of dealerships and franchises to expand and optimize its portfolio are likely to boost its prospects. In 2021, the company acquired Prime Automotive in the Northeastern United States and the Robinsons Group in the UK, which diversified Group 1’s footprint and are set to buoy top-line growth. Last year, GPI completed transactions representing $2.5 billion of acquired revenues. The AcceleRide platform, Group 1’s online retailing initiative, augurs well for long-term growth. Group 1’s investor-friendly moves instill optimism. In August, the company hiked its payout and boosted share repurchase program.
Group 1 currently carries a Zacks Rank #3 and has a Value Score of A. The Zacks Consensus Estimate for GPI’s 2022 earnings per share and sales implies year-over-year growth of 30% and 16.5%, respectively.
AutoNation: Diversified product mix, digitization ramp-up, strong vehicle margins and strategic buyouts are set to fuel AutoNation’s prospects. The acquisitions of Peacock Automotive Group and Priority 1 have buoyed AutoNation’s portfolio. Increased focus on cost discipline is aiding margins. With the launch of its digital platform AutoNation Express, the company has stepped up its digitization game. AutoNation is committed to operating at/below 60% selling, general and administrative as a percentage of gross profit in 2022, signaling a major improvement from its 71%-73% range over the last several years. Thanks to solid income generation, the firm is committed to shareholder value maximization, boosting investors’ confidence. In July, AutoNation boosted its buyback authorization by $1 billion.
AN currently carries a Zacks Rank #3 and has a Value Score of A. The Zacks Consensus Estimate for AutoNation’s 2022 earnings per share and sales implies year-over-year growth of 35.4% and 5%, respectively.
Image: Shutterstock
Forget Carvana (CVNA), Focus on These 3 Auto Retailers Instead
Carvana (CVNA - Free Report) is traversing rough waters as is evident from its share price decline of 91.7% so far this year. Shares of the used car e-retailer hit a 52-week low of $18.81 on Friday, before closing the session at $19.27. Friday’s decline of about 9% came amid a wider market selloff.
September’s job report was out on Friday. Employment Situation report came in better than expected with 263,000 new jobs created in September versus the consensus for 250,000. With jobs still hot, it seems that the aggressive rate hikes so far have not had much of an impact on slowing down the economy (and thus inflation) and that the Fed will need to keep jacking up rates.
Well, amid rising interest rates and economic uncertainty, the entire auto sector is under pressure. But Carvana has suffered a rather massive blow owing to its weak financials, escalating expenses and management’s gloomy outlook. Now, the company doesn’t expect to generate positive EBITDA until next year. Amid the challenges, Carvana currently carries a Zacks Rank #4 (Sell).
While we delve into what’s ailing Carvana, we would also highlight why a few auto retailers like Sonic Automotive (SAH - Free Report) , Group 1 Automotive (GPI - Free Report) and AutoNation (AN - Free Report) still look promising despite the headwinds grappling the broader auto market.
Carvana in Crisis
Since Carvana went public in 2017, it has not yet turned an annual profit. In fact, its net loss has mostly been widening. Net loss incurred in 2017, 2018, 2019 and 2020 was $164.3 million, $254.7 million, $364.6 million and $462.2 million, respectively. While the second quarter of 2021 marked the first positive net income quarter for the company, for full-year 2021, the company again incurred a net loss of $287 million. In both the first and the second quarters of 2022, the firm incurred a wider-than-expected loss. Amid the firm’s persistently rising capital investments to expand the business, Carvana is not likely to generate net annual profit this year as well.
The economic slowdown and rising interest rates are only adding to the woes. With the cost of vehicle financing increasing and recession threats looming, customers are likely to put such discretionary expenses on the back burner, which may hurt sales. Early this month, CVNA’s close peer CarMax missed earnings expectations amid a decline in the number of vehicles sold.
It should be noted that the used car market is gradually slowing down. Both the Manheim Used Vehicle Value Index and non-seasonally adjusted prices declined year over year in September. With wholesale used car prices starting to recede as the market cools, retail prices could be next to fall. If the demand for vehicles doesn’t hold up well, falling used car prices will severely weigh on gross margins.
In light of the uncertain macro environment and inflationary concerns, Carvana has also withdrawn its 2022 outlook. Discouragingly, the company has pushed back the GPU expectation of over $4,000 to 2023. Also, its forecast of achieving EBITDA breakeven in the last three quarters of 2022 combined has now been pushed back amid broader industry challenges and macroeconomic headwinds.
Investors believe that cash is king in the current environment of high inflation, rising rates, and an economic slowdown. But Carvana’s stretched balance sheet is a big concern. As of Jun 30, 2022, Carvana’s long-term debt rose to $6,605 million from $3,208 million as of 2021-end. Its debt-to-capital ratio stands at 0.90 compared with the industry’s 0.27. Elevated leverage, both in absolute and relative terms, restricts the firm’s flexibility to tap into growth opportunities. The firm’s debt is also quite high compared with cash and cash equivalents of $1,047 million. Its cash ratio is just 0.5.
Carvana has been bearing the brunt of escalating selling, general and administration (SG&A) expenses since its inception and the trend is likely to continue. SG&A costs amounted to $786.7 million, $1,126 million and $2,033 million in 2019, 2020 and 2021, respectively. In the last reported quarter, SG&A flared up 53.4% year over year. Amid high capex and other expenses, the firm hasn’t recorded positive free cash flow.
Strong liquidly profile and positive free cash flows become all the more important amid uncertainties in the global economy, market disruptions and dislocations. With Carvana constantly incurring losses and generating negative cash flow, you should stay away from the stock. With the stock 94% off its 52-week high, if you think it represents a buying opportunity, it’s not. Unfortunately for Carvana and its shareholders, the stock looks more like a value trap, even at current levels.
It should also be noted that Carvana has a high beta of 2.7. With the market sailing through a historically-volatile year, a high beta stock is perceived as riskier as it is more susceptible to the market’s moves.
The Zacks Consensus Estimate for CVNA’s 2022 bottom line is pegged at a loss of $8.90 a share, implying a year-over-year deterioration of 446%. The consensus mark for loss has widened 51 cents in the past seven days.
3 Auto Retailers to Add to Your Watchlist
While the aforementioned factors have made Carvana a risky pick, not all industry players have been losing ground. A few have managed to maintain a firm footing on the back of effective strategies, cost-containment efforts, strategic acquisitions and diversification. These strategies have been aiding them to counter the sector’s weakness effectively. We present three stocks from the auto retail space that should be on your radar for long-term gains.
Sonic: Sonic is committed to optimizing its Franchised Dealership business, both through organic growth initiatives and strategic acquisitions. The buyout of RFJ Auto Partners has substantially boosted Sonic’s portfolio and geographical footprint and has catapulted the company into the top-five biggest dealership groups in the United States.Its strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform and user interface bode well for Sonic. SAH is likely to gain from strong organic growth fueled by its EchoPark unit expansion. The company’s commitment to actively pursue capital deployment strategies to boost shareholder value through dividend and share repurchase programs is also praiseworthy.
The company currently carries a Zacks Rank #3 (Hold) and has a Value Score of A. The Zacks Consensus Estimate for SAH’s 2022 earnings per share and sales implies year-over-year growth of 17.5% and 24.4%, respectively.
Group 1: Group 1's diversified product mix and multiple streams of income reduce its risk profile. GPI’s acquisitions of dealerships and franchises to expand and optimize its portfolio are likely to boost its prospects. In 2021, the company acquired Prime Automotive in the Northeastern United States and the Robinsons Group in the UK, which diversified Group 1’s footprint and are set to buoy top-line growth. Last year, GPI completed transactions representing $2.5 billion of acquired revenues. The AcceleRide platform, Group 1’s online retailing initiative, augurs well for long-term growth. Group 1’s investor-friendly moves instill optimism. In August, the company hiked its payout and boosted share repurchase program.
Group 1 currently carries a Zacks Rank #3 and has a Value Score of A. The Zacks Consensus Estimate for GPI’s 2022 earnings per share and sales implies year-over-year growth of 30% and 16.5%, respectively.
AutoNation: Diversified product mix, digitization ramp-up, strong vehicle margins and strategic buyouts are set to fuel AutoNation’s prospects. The acquisitions of Peacock Automotive Group and Priority 1 have buoyed AutoNation’s portfolio. Increased focus on cost discipline is aiding margins. With the launch of its digital platform AutoNation Express, the company has stepped up its digitization game. AutoNation is committed to operating at/below 60% selling, general and administrative as a percentage of gross profit in 2022, signaling a major improvement from its 71%-73% range over the last several years. Thanks to solid income generation, the firm is committed to shareholder value maximization, boosting investors’ confidence. In July, AutoNation boosted its buyback authorization by $1 billion.
AN currently carries a Zacks Rank #3 and has a Value Score of A. The Zacks Consensus Estimate for AutoNation’s 2022 earnings per share and sales implies year-over-year growth of 35.4% and 5%, respectively.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.