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High sticker prices of vehicles, digitalization ramp-up and strategic expansion initiatives are boosting the results of the Zacks Auto Retail and Whole Sales industry participants. Given their strong performance and cash flow generation, auto retailers are committed to actively pursuing capital deployment strategies through dividend and share repurchase programs to boost investors' value.
While the demand for vehicles has held strong so far, will consumers be willing to pay a premium for their preferred vehicles even in the face of rising interest rates? Or will the industry participants resort to sweeter financing deals and discounts to hold up the demand if customers get unwilling to shell more for these discretionary items? Despite macro challenges, companies like Asbury Automotive, Rush Enterprises, Group 1 Automotive and Sonic Automotive are well-placed to escape headwinds.
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.
Key Themes to Decide the Industry's Fate
High Average Price of Vehicles Enhancing Margins: Shortage in the supply of semiconductors — a byproduct of COVID that only got worsened by the Russia-Ukraine conflict — has put a lid on inventory levels. And that’s resulting in higher average transaction prices of vehicles. While inventory is finally starting to pick up, as supply chain snafus are gradually easing, sticker prices of new vehicles are not likely to drop in 2022 amid persistent inflationary pressure. This should enable auto retailers to record high vehicle margins, thereby boosting their bottom line.
Transformation Toward E-commerce Augurs Well: Automotive e-commerce is flourishing and how! Today, consumers prefer buying vehicles online as enhanced digital solutions are providing them with a truly comprehensive and personal experience.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’ websites. With digitization gathering steam, auto retail companies are poised to reach new heights.
Expansion Initiative Continues: Last year, there was a flurry of dealership mergers and acquisition deals. The consolidation wave in the industry continues, with large retailers 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 as well as broaden their geographic customer base. These expansion efforts are bolstering the scalability, revenues and competitive advantage of auto retailers.
Shareholder-Friendly Moves in Place: Strong vehicle margins, digitization ramp-up and strategic buyouts are enabling auto retailers to generate strong results. Free cash flow is soaring, and companies are actively boosting shareholder value via dividends and share buybacks.
Vehicle Affordability is the New Concern: While things have been going all hunky-dory for auto retailers, affordability challenges are emerging in the face of macro headwinds. It’s to be seen if Americans wish to continue to splurge on these high-ticket items, given the rising interest rates and economic uncertainty. Per Cox, the new vehicle loan rate at the end of the third quarter was 7%, up 2 percentage points. The cost of financing is only expected to keep rising.With borrowing getting expensive and threats of a recession looming large, consumers might be unwilling to pay a heavy premium for cars.
Zacks Industry Rank Instills Optimism
The Zacks Auto Retail & Wholesale industry is a nine-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #87, which places it in the top 35% 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 outperform 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 May, the industry’s earnings estimates for 2022 have increased 3.4%.
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 Tops Sector, Underperforms S&P 500
The Zacks Auto Retail & Wholesale industry has outperformed the Auto, Tires and Truck sector but underperformed the Zacks S&P 500 composite over the past year. The industry has declined 20.5% over this period compared with the sector and the S&P 500’s decline of 35% and 19.3%, respectively.
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 4.88X compared with the S&P 500’s 11.40X and the sector’s trailing 12-month EV/EBITDA of 13.32X.
Over the past five years, the industry has traded as high as 10.08X, as low as 4.28X and at a median of 7X.
4 Auto Retailers That Hold Promise
Rush: Rush operates a regional network of commercial vehicle dealerships and sells new and used heavy-duty and medium-duty trucks and buses. The purchase of certain assets of Summit Truck Group in December 2021 has strengthened its dealership network. The acquisition of an additional 30% interest in Rush Truck Centers of Canada Limited in May 2022 also expanded business. RUSHA’s current dividend yield is 1.75%, with a five-year dividend growth rate of 35%. The company has increased its payout six times in the last five years.
Rush carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The Zacks Consensus Estimate for RUSHA’s 2022 earnings per share implies growth of 36.2%. The expected long-term earnings growth rate for the stock is 15%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Asbury: Asbury is one of the largest automotive retailers of new and used vehicles, and related services in the United States.The acquisition of Larry H. Miller Dealerships has bolstered Asbury’s regional footprint and will add nearly $5.7 billion in expected annualized revenues. ABG’s ambitious plan to generate $32 billion in revenues by 2025 instills optimism. The company’s end-to-end e-commerce platform—Clicklane—is on track to generate around $1 billion in sales in 2022 and $2.2 billion by the end of 2023.
Asbury carries a Zacks Rank #3 (Hold) and has a VGM Score of A. The Zacks Consensus Estimate for ABG’s 2022 earnings per share implies growth of 37%. The expected long-term earnings growth rate for the stock is 18.5%.
Group 1: Another notable automotive retailer, Group 1 operates primarily in the United States and U.K. In 2021, the company acquired Prime Automotive in the Northeastern United States and the Robinsons Group in the U.K., which diversified Group 1’s footprint. The AcceleRide platform, Group 1’s online retailing initiative, is yielding positive results. Group 1 is also riding on the strength of its aftersales business and anticipates trends to remain robust for the rest of 2022. The company has hiked its dividend twelve times in the last five years, with an average annualized growth rate of 9.3%.
Group 1 carries a Zacks Rank #3 and has a VGM Score of A. The Zacks Consensus Estimate for GPI’s 2022 earnings per share implies growth of 30%. The expected long-term earnings growth rate for the stock is 14.1%.
Sonic: One of the leading retailers of new and used cars, Sonic is committed to optimizing its franchised dealership business through organic growth initiatives and strategic acquisitions. The RFJ buyout 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. Sonic’s EchoPark unit is the major growth engine of the firm. Riding on a robust cash flow generation and sound capital allocation, Sonic increased its share repurchase authorization by $500 million in the last reported quarter.
Sonic carries a Zacks Rank #3 and has a Value Score of A. The Zacks Consensus Estimate for SAH’s 2022 earnings per share and sales implies growth of 17.5% and 18.7%, respectively.
Why Haven’t You Looked at Zacks' Top Stocks?
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Asbury Automotive, Rush Enterprises, Group 1 Automotive and Sonic Automotive
For Immediate Release
Chicago, IL – October 21, 2022 – Today, Zacks Equity Research discusses Asbury Automotive (ABG - Free Report) , Rush Enterprises (RUSHA - Free Report) , Group 1 Automotive (GPI - Free Report) and Sonic Automotive (SAH - Free Report) .
Industry: Auto - Retail & Wholesale
Link: https://www.zacks.com/commentary/1994693/4-stocks-to-watch-as-auto-retail-industry-holds-its-ground
High sticker prices of vehicles, digitalization ramp-up and strategic expansion initiatives are boosting the results of the Zacks Auto Retail and Whole Sales industry participants. Given their strong performance and cash flow generation, auto retailers are committed to actively pursuing capital deployment strategies through dividend and share repurchase programs to boost investors' value.
While the demand for vehicles has held strong so far, will consumers be willing to pay a premium for their preferred vehicles even in the face of rising interest rates? Or will the industry participants resort to sweeter financing deals and discounts to hold up the demand if customers get unwilling to shell more for these discretionary items? Despite macro challenges, companies like Asbury Automotive, Rush Enterprises, Group 1 Automotive and Sonic Automotive are well-placed to escape headwinds.
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.
Key Themes to Decide the Industry's Fate
High Average Price of Vehicles Enhancing Margins: Shortage in the supply of semiconductors — a byproduct of COVID that only got worsened by the Russia-Ukraine conflict — has put a lid on inventory levels. And that’s resulting in higher average transaction prices of vehicles. While inventory is finally starting to pick up, as supply chain snafus are gradually easing, sticker prices of new vehicles are not likely to drop in 2022 amid persistent inflationary pressure. This should enable auto retailers to record high vehicle margins, thereby boosting their bottom line.
Transformation Toward E-commerce Augurs Well: Automotive e-commerce is flourishing and how! Today, consumers prefer buying vehicles online as enhanced digital solutions are providing them with a truly comprehensive and personal experience.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’ websites. With digitization gathering steam, auto retail companies are poised to reach new heights.
Expansion Initiative Continues: Last year, there was a flurry of dealership mergers and acquisition deals. The consolidation wave in the industry continues, with large retailers 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 as well as broaden their geographic customer base. These expansion efforts are bolstering the scalability, revenues and competitive advantage of auto retailers.
Shareholder-Friendly Moves in Place: Strong vehicle margins, digitization ramp-up and strategic buyouts are enabling auto retailers to generate strong results. Free cash flow is soaring, and companies are actively boosting shareholder value via dividends and share buybacks.
Vehicle Affordability is the New Concern: While things have been going all hunky-dory for auto retailers, affordability challenges are emerging in the face of macro headwinds. It’s to be seen if Americans wish to continue to splurge on these high-ticket items, given the rising interest rates and economic uncertainty. Per Cox, the new vehicle loan rate at the end of the third quarter was 7%, up 2 percentage points. The cost of financing is only expected to keep rising.With borrowing getting expensive and threats of a recession looming large, consumers might be unwilling to pay a heavy premium for cars.
Zacks Industry Rank Instills Optimism
The Zacks Auto Retail & Wholesale industry is a nine-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #87, which places it in the top 35% 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 outperform 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 May, the industry’s earnings estimates for 2022 have increased 3.4%.
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 Tops Sector, Underperforms S&P 500
The Zacks Auto Retail & Wholesale industry has outperformed the Auto, Tires and Truck sector but underperformed the Zacks S&P 500 composite over the past year. The industry has declined 20.5% over this period compared with the sector and the S&P 500’s decline of 35% and 19.3%, respectively.
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 4.88X compared with the S&P 500’s 11.40X and the sector’s trailing 12-month EV/EBITDA of 13.32X.
Over the past five years, the industry has traded as high as 10.08X, as low as 4.28X and at a median of 7X.
4 Auto Retailers That Hold Promise
Rush: Rush operates a regional network of commercial vehicle dealerships and sells new and used heavy-duty and medium-duty trucks and buses. The purchase of certain assets of Summit Truck Group in December 2021 has strengthened its dealership network. The acquisition of an additional 30% interest in Rush Truck Centers of Canada Limited in May 2022 also expanded business. RUSHA’s current dividend yield is 1.75%, with a five-year dividend growth rate of 35%. The company has increased its payout six times in the last five years.
Rush carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The Zacks Consensus Estimate for RUSHA’s 2022 earnings per share implies growth of 36.2%. The expected long-term earnings growth rate for the stock is 15%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Asbury: Asbury is one of the largest automotive retailers of new and used vehicles, and related services in the United States.The acquisition of Larry H. Miller Dealerships has bolstered Asbury’s regional footprint and will add nearly $5.7 billion in expected annualized revenues. ABG’s ambitious plan to generate $32 billion in revenues by 2025 instills optimism. The company’s end-to-end e-commerce platform—Clicklane—is on track to generate around $1 billion in sales in 2022 and $2.2 billion by the end of 2023.
Asbury carries a Zacks Rank #3 (Hold) and has a VGM Score of A. The Zacks Consensus Estimate for ABG’s 2022 earnings per share implies growth of 37%. The expected long-term earnings growth rate for the stock is 18.5%.
Group 1: Another notable automotive retailer, Group 1 operates primarily in the United States and U.K. In 2021, the company acquired Prime Automotive in the Northeastern United States and the Robinsons Group in the U.K., which diversified Group 1’s footprint. The AcceleRide platform, Group 1’s online retailing initiative, is yielding positive results. Group 1 is also riding on the strength of its aftersales business and anticipates trends to remain robust for the rest of 2022. The company has hiked its dividend twelve times in the last five years, with an average annualized growth rate of 9.3%.
Group 1 carries a Zacks Rank #3 and has a VGM Score of A. The Zacks Consensus Estimate for GPI’s 2022 earnings per share implies growth of 30%. The expected long-term earnings growth rate for the stock is 14.1%.
Sonic: One of the leading retailers of new and used cars, Sonic is committed to optimizing its franchised dealership business through organic growth initiatives and strategic acquisitions. The RFJ buyout 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. Sonic’s EchoPark unit is the major growth engine of the firm. Riding on a robust cash flow generation and sound capital allocation, Sonic increased its share repurchase authorization by $500 million in the last reported quarter.
Sonic carries a Zacks Rank #3 and has a Value Score of A. The Zacks Consensus Estimate for SAH’s 2022 earnings per share and sales implies growth of 17.5% and 18.7%, respectively.
Why Haven’t You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.