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Auto Retail & Whole Sales Outlook: Speed Brakes on Growth Path

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A smooth retail and wholesale network holds the key to a well-functioning automotive sector. Through retailing and dealerships, companies in the Zacks Auto Retail and Wholesale  industry perform a variety of duties, such as selling of new and used vehicles and light trucks, selling of auto parts, arranging vehicle financing, providing repair and maintenance services etc.
At present, the industry is enjoying some discernible advantages in the forms of growing consumer disposable income, easy availability of credit and of course a better employment scenario. It is anticipated that the industry revenues will rise as an increasing number of consumers are entering the market.

We should keep in mind however that overall U.S. auto sales are already at very high levels. As such, while there may still be some upside to sales from current levels, the bulk of the easy gains have likely been made already. The shift to autonomous and electric vehicles is likely more of a long-term issue for the industry, but the tariffs issue and uncertainty about the future of NAFTA are likely more immediate worries.

Industry Lags on Shareholder Returns

Looking at the shareholder returns over the past year, it appears that the strength in the broader economy wasn’t enough to enhance investors’ confidence in the industry’s growth prospect. The anxiety over the changes and tariff-induced fears have kept investors on edge about the price prospects of the industry.

The Auto - Retail and Whole Sales industry, which is a nine-stock group within the broader Zacks Retail And Wholesale sector, has underperformed both its own sector and the S&P 500 over the past one year.

While the stocks in this industry have collectively gained 6.7%, the Zacks S&P 500 Composite and Zacks Retail And Wholesale sector have increased 14.7% and 35.8%, respectively (the blue line in the chart below represents the industry).

One-Year Price Performance

Auto Retail and Wholesale Stocks Trading Cheap

Thanks to the underperformance of the industry over the past year, the valuation picture looks attractive at present.

We can look at various valuation metrics to evaluate the industry's valuation picture and all of those will likely help us reach the same conclusion. A key metric that value investors always look at is the price to earnings ratio. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world.

The picture appears attractive, in comparison to the S&P 500. The industry currently has a trailing 12-month PE of 10.7X, at a discount to the S&P 500’s 20.8X PE. As the chart below shows, the industry has traded as high as 14.6X and as low as 10.7X, with a 12-month median of 12.4X.

Price-to-Earnings Ratio (TTM)

Looking at industry's valuation history relative to the broader market, we find out that the industry also traded at a discount to the Zacks Retail And Wholesale sector.

Price-to-Earnings Ratio (TTM)


Underperformance May Continue Due to Bleak Earnings Outlook

The ongoing threat of imposition of the tariff has affected the sentiment of the auto industry as a whole, keeping a lid on shareholders’ returns.

The industry’s recent stock market underperformance notwithstanding, the more relevant question for investors pertains to handicapping how the industry will perform over the coming weeks and months.

A good handle on the industry’s, and companies’, evolving earnings outlook can help answer that question for us.  Empirical research shows that the earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.

The Price & Consensus chart for the industry below shows the market's evolving bottom-up earnings expectations for the industry and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.

Price and Consensus: Zacks Auto Retail & Whole Sales Industry

This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Please note that the $4.81 EPS estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in the Auto Retail & Whole Sales industry but rather an illustrative aggregate number created by our proprietary analytics model.  The key factor to keep in mind is not earnings of $4.81 per share of the industry for 2018, but how this estimate has evolved recently.

While the consensus estimate for the Auto Retail & Whole Sales of $4.81 per share implies mostly a decent year-over-year improvement, the trend in earnings estimate revisions has not been favorable lately.

Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings potential.

Current Fiscal Year EPS Estimate Revisions

Industry Rank Good But Not Rising

Moreover, the group’s Zacks Industry Rank, which is actually the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term, though the industry rank lies in the top 50%.

The Auto Retail & Whole Sales industry currently carries a Zacks Industry Rank #60, which places it at the top 23% of roughly 256 Zacks industries. 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.

Our proprietary Heat Map shows that the group’s rank started declining in the last four weeks. However, its rank was in the top 50% industry rank throughout the past eight weeks.


Auto - Retail And Whole Sales industry’s Long-Term Growth
Despite the group’s huge value potential, the mean estimate of long-term (3-5 years) EPS growth rate of 8.5% of the industry is lower than Zacks S&P 500 Composite index’s EPS growth rate of 9.8%. In fact, in the last few months, the mean EPS estimate of the industry has been showing a declining trend, whereas that of the Zacks S&P 500 Composite index’s remained almost unchanged.

The revenue growth trend for 2016 and 2017 is pretty steady. However, since the beginning of 2018, this trend has reversed and revenue growth is showing a declining trend.

Mean Estimate of Long-Term EPS Growth Rate

Revenues - Auto - Retail and Whole Sales industry

Bottom Line

A closer look at the Zacks Auto Retail and Wholesale industry leads to some interesting revelations. Cheap valuation and decent industry rank are some bright spots. Moreover, these two fundamental factors are bolstered by a strong economy and favorable labor market conditions.

However, several changes and challenges put a huge strain on the revenue prospects of the industry at least in the near term. The unending trade battle and fears of impending tariffs give a big jolt to the industry. Also, the industry’s preparedness toward new changes such as frequent launch of new models, and inception of autonomous and electric vehicles are some temporary impediments to the industry.

Currently, Rush Enterprises, Inc. (RUSHA - Free Report) , which belongs to this industry, sports a Zacks Rank #1 (Strong Buy) and the Zacks Consensus Estimate for the current-year EPS was revised 4.8% upward over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: RUSHA

Below are a couple of stocks that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #2 (Buy).

Penske Automotive Group, Inc. (PAG - Free Report) : The stock of this Bloomfield Hills, MI-based automobile company has gained 17.1% over the past year. The Zacks Consensus Estimate for the current-year EPS was revised 2.7% upward over the last 30 days.

Price and Consensus: PAG
America's Car-Mart, Inc. (CRMT - Free Report) : The stock of this Bentonville, AR-based automotive retailer has gained 59.5% over the past year. The Zacks Consensus Estimate for the current-year EPS was revised 3.9% upward over the last 60 days.

Price and Consensus: CRMT

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