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Auto Retail Industry on the Sunny Side: 4 Stocks in View
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The Zacks Auto Retail and Whole Sales industry is riding on a smooth road, courtesy of increasing vehicle demand amid preference for personal mobility and easier credit conditions. Well, the industry may face some hiccups as various auto biggies across the world are trimming production due to global chip shortage.
However, the near-term outlook looks sanguine as dealerships are not likely to run out of inventories anytime soon. Also, rising demand for electric vehicles (EVs) is buoying the industry’s prospects. Industry participants including Lithia Motors (LAD - Free Report) , AutoNation (AN - Free Report) , Sonic Automotive (SAH - Free Report) and Americas CarMart, Inc. (CRMT - Free Report) are also set to benefit from e-commerce initiatives, which are in the spotlight amid the pandemic-led milieu of social distancing
Industry Info
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 as well as light trucks and auto parts, execution of repair and maintenance services along with arrangement of vehicle financing.
A Look at the Key Themes Currently Impacting the Industry
Digitization Paying Off: As a result of the COVID-19 pandemic, the process of buying cars underwent a digital transformation that is here to stay. The industry is exploring new opportunities in e-commerce retailing. The launch of a simple, secure and user-friendly online platform is aiding the seamless end-to-end digitization of companies’ sales process. Race to invest vast sums in the e-commerce domain is gathering steam, propelling businesses to reach new heights.
Soaring EV Popularity Spiking Sales: The Auto Retail & Whole Sales industry is witnessing considerable changes in the operating environment. Widespread usage of technology is resulting in fundamental restructuring of the automotive market. A shift toward electric and self-driving vehicles made it necessary for industry players to reorient their business model. Even amid the pandemic, demand for green vehicles was on the upswing and the trend is likely to continue amid climate change concerns and favorable government policies. High demand and sales of zero-emission vehicles are likely to raise the industry prospects.
Chip Famine May Pose Threat: While demand for vehicles is shooting up, the auto market is currently battling againstshortage in the supply of semiconductors. Global chip deficit is hindering business operations and forcing the players to idle production lines across the world. With the production coming to a halt, consumers are likely to have a hard time in finding new vehicles and specific models at dealerships. This may induce lost revenues for the auto retail and whole sales industry.
Zacks Industry Rank Augurs Optimism
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 #69, which places it in the top 27% 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 Aug 31, 2020, the industry’s earnings estimates for 2020 have moved up 20%.
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 the valuation picture.
Industry Underperforms Sector, Outshines S&P 500
While the Zacks Auto Retail & Whole Sales industry has lagged the Auto, Tires and Truck sector, it has comfortably surpassed the Zacks S&P 500 composite over the past year.The industry has increased 73.7% over this period compared with the S&P 500’s rise of 18.5%. However, the industry has fallen short of the sector’s rally of 96.4% in the said period.
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 9.84X compared with the S&P 500’s 16.67X and the sector’s trailing12-month EV/EBITDA of 21.21X.
Over the past five years, the industry has traded as high as 9.96X, as low as 4.33X and at a median of 7.27X as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
Auto Retailers to Keep Tabs on
Sonic Automotive: One of the noteworthy auto retailers, Sonic engages in selling new and used cars and light trucks as well as offers warranties, service contracts, vehicle financing and insurance. The company’s used vehicle unit EchoPark is expected to boost the firm’s profitability. Strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform and user interface bodes well for Sonic. The Zacks Consensus Estimate for 2021 and 2022 earnings indicates a year over year uptick of 42.6% and 15.5%, respectively. Sonic currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SAH
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. The company grew revenues at 7.3% over the last five years that accelerated in 2020 to 11.3%. The Zacks Consensus Estimate for fiscal 2021 and 2022 revenues point to a year over year increase of 13.9% and 4.3%, respectively. In the last five years, the company’s earnings grew 45.8%. Earnings growth rate is projected at 48.2% this year and at 2.2% in the next. The company currently holds a Zacks Rank #2.
Price and Consensus: CRMT
Lithia Motors: Lithia is one of the leading automotive retailers of new and used vehicles, and related services in the United States. The spree of buyouts brought the company's network expansion to more than $3.5 billion in revenues during 2020. The presently Zacks Rank #3 (Hold) company has additional $7-$10 billion worth of potential acquisitions and expects its network expansion in 2021 to exceed the record levels attained in 2020. The firm’s omni-channel marketing is boosting its profitability and market presence. The Zacks Consensus Estimate for 2021 revenues and earnings hints at a 39.1% and 10.6% improvement each from the respective year-ago recorded levels.
Price and Consensus: LAD
AutoNation: Headquartered in Delaware, AutoNation is one of the most significant automotive retailers in the United States. Strong footprint, large dealer network and store expansion efforts along with brand extension strategy and alliances bode well for AutoNation.Ship-to-home next day, curb-side pick-up option, and buy online, pick-up in stores options are picking pace, thereby driving additional traffic to the company’s online site. Deepened focus on cost discipline and balance sheet strength are other positives. The Zacks Consensus Estimate for 2021 revenues implies a year over year increase of 6.6%. The firm carries a Zacks Rank #3, currently.
Price and Consensus: AN
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
Image: Shutterstock
Auto Retail Industry on the Sunny Side: 4 Stocks in View
The Zacks Auto Retail and Whole Sales industry is riding on a smooth road, courtesy of increasing vehicle demand amid preference for personal mobility and easier credit conditions. Well, the industry may face some hiccups as various auto biggies across the world are trimming production due to global chip shortage.
However, the near-term outlook looks sanguine as dealerships are not likely to run out of inventories anytime soon. Also, rising demand for electric vehicles (EVs) is buoying the industry’s prospects. Industry participants including Lithia Motors (LAD - Free Report) , AutoNation (AN - Free Report) , Sonic Automotive (SAH - Free Report) and Americas CarMart, Inc. (CRMT - Free Report) are also set to benefit from e-commerce initiatives, which are in the spotlight amid the pandemic-led milieu of social distancing
Industry Info
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 as well as light trucks and auto parts, execution of repair and maintenance services along with arrangement of vehicle financing.
A Look at the Key Themes Currently Impacting the Industry
Digitization Paying Off: As a result of the COVID-19 pandemic, the process of buying cars underwent a digital transformation that is here to stay. The industry is exploring new opportunities in e-commerce retailing. The launch of a simple, secure and user-friendly online platform is aiding the seamless end-to-end digitization of companies’ sales process. Race to invest vast sums in the e-commerce domain is gathering steam, propelling businesses to reach new heights.
Soaring EV Popularity Spiking Sales: The Auto Retail & Whole Sales industry is witnessing considerable changes in the operating environment. Widespread usage of technology is resulting in fundamental restructuring of the automotive market. A shift toward electric and self-driving vehicles made it necessary for industry players to reorient their business model. Even amid the pandemic, demand for green vehicles was on the upswing and the trend is likely to continue amid climate change concerns and favorable government policies. High demand and sales of zero-emission vehicles are likely to raise the industry prospects.
Chip Famine May Pose Threat: While demand for vehicles is shooting up, the auto market is currently battling againstshortage in the supply of semiconductors. Global chip deficit is hindering business operations and forcing the players to idle production lines across the world. With the production coming to a halt, consumers are likely to have a hard time in finding new vehicles and specific models at dealerships. This may induce lost revenues for the auto retail and whole sales industry.
Zacks Industry Rank Augurs Optimism
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 #69, which places it in the top 27% 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 Aug 31, 2020, the industry’s earnings estimates for 2020 have moved up 20%.
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 the valuation picture.
Industry Underperforms Sector, Outshines S&P 500
While the Zacks Auto Retail & Whole Sales industry has lagged the Auto, Tires and Truck sector, it has comfortably surpassed the Zacks S&P 500 composite over the past year.The industry has increased 73.7% over this period compared with the S&P 500’s rise of 18.5%. However, the industry has fallen short of the sector’s rally of 96.4% in the said period.
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 9.84X compared with the S&P 500’s 16.67X and the sector’s trailing12-month EV/EBITDA of 21.21X.
Over the past five years, the industry has traded as high as 9.96X, as low as 4.33X and at a median of 7.27X as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
Auto Retailers to Keep Tabs on
Sonic Automotive: One of the noteworthy auto retailers, Sonic engages in selling new and used cars and light trucks as well as offers warranties, service contracts, vehicle financing and insurance. The company’s used vehicle unit EchoPark is expected to boost the firm’s profitability. Strategic partnership with Cox Automotive and Darwin Automotive to develop a proprietary e-commerce platform and user interface bodes well for Sonic. The Zacks Consensus Estimate for 2021 and 2022 earnings indicates a year over year uptick of 42.6% and 15.5%, respectively. Sonic currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SAH
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. The company grew revenues at 7.3% over the last five years that accelerated in 2020 to 11.3%. The Zacks Consensus Estimate for fiscal 2021 and 2022 revenues point to a year over year increase of 13.9% and 4.3%, respectively. In the last five years, the company’s earnings grew 45.8%. Earnings growth rate is projected at 48.2% this year and at 2.2% in the next. The company currently holds a Zacks Rank #2.
Price and Consensus: CRMT
Lithia Motors: Lithia is one of the leading automotive retailers of new and used vehicles, and related services in the United States. The spree of buyouts brought the company's network expansion to more than $3.5 billion in revenues during 2020. The presently Zacks Rank #3 (Hold) company has additional $7-$10 billion worth of potential acquisitions and expects its network expansion in 2021 to exceed the record levels attained in 2020. The firm’s omni-channel marketing is boosting its profitability and market presence. The Zacks Consensus Estimate for 2021 revenues and earnings hints at a 39.1% and 10.6% improvement each from the respective year-ago recorded levels.
Price and Consensus: LAD
AutoNation: Headquartered in Delaware, AutoNation is one of the most significant automotive retailers in the United States. Strong footprint, large dealer network and store expansion efforts along with brand extension strategy and alliances bode well for AutoNation.Ship-to-home next day, curb-side pick-up option, and buy online, pick-up in stores options are picking pace, thereby driving additional traffic to the company’s online site. Deepened focus on cost discipline and balance sheet strength are other positives. The Zacks Consensus Estimate for 2021 revenues implies a year over year increase of 6.6%. The firm carries a Zacks Rank #3, currently.
Price and Consensus: AN
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>