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3 Stocks to Bet On in an Upbeat Auto Retail Industry
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The Zacks Auto Retail and Whole Sales industry is going great guns, thanks to continued vehicle demand coupled with rising average prices of both new and used cars. Auto retailers are benefiting from high vehicle margins, which are boosting their bottom line. Digitization is also yielding results and propelling the businesses to reach new heights. Multiple industry tailwinds augur well for industry participants including Lithia Motors (LAD - Free Report) , Penske Automotive (PAG - Free Report) and Group 1 Automotive (GPI - Free Report) . These stocks are registering impressive profits and cash flowsand remain committed to increasing shareholder value.
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 Investing Trends
Rising Vehicle Prices: While the demand for vehicles has been strong, automakers are reeling under severe chip crisis — a byproduct of COVID — worsened by the Russia-Ukraine war. This has disrupted supply chain system and adversely impacted the supply of new vehicles. The supply-demand mismatch is resulting in low inventory levels, which are leading to a spike in vehicle prices. Consequently, auto retailers are recording high vehicle margins, which are boosting their bottom line.
Digitization Ramp-Up: The process of buying cars has undergone a digital transformation, with online sales getting ever so popular. Auto dealers are ramping up e-commerce initiatives to make deals with customers and arranging for home deliveries of vehicles. The launch of a simple, secure and user-friendly online platform is aiding in seamless end-to-end digitization of the companies’ sales processes. With digitization gathering steam, auto retail companies are poised to reach new heights.
Shareholder-Friendly Moves: Thanks to solid cash generating potential amid high demand (especially for used cars), strong vehicle margins and e-commerce efforts, auto retailers are generating record profits. With increasing free cash flow is soaring, firms are actively boosting shareholder value via dividends and share buybacks. Noted auto retailers including Sonic, AutoNation, Lithia, Group 1 and Penske have resorted to dividend hikes and/or boosted buyback lately, instilling shareholders’ confidence
Zacks Industry Rank Indicates Bright Prospects
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 #4, which places it in the top 2% 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 Mar 31, 2022, the industry’s earnings estimates for 2022 have moved up 6.6%.
Before we present you a few top-ranked stocks to capitalize on the thriving prospects of the auto retail space, let’s take a look at the industry’s recent stock-market performance and the valuation picture.
Industry Tops Sector and S&P 500
The Zacks Auto Retail & Whole Sales industry has outperformed the Zacks S&P 500 composite as well as the Auto, Tires and Truck sector over the past year. The industry has gained 2.1% over this period compared with the S&P 500’s and the sector’s decline of 12.7% and 27.5%, 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.
On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 5.31X compared with the S&P 500’s 12.22X and the sector’s trailing 12-month EV/EBITDA of 17.06X.
Over the past five years, the industry has traded as high as 10.08X, as low as 4.28X and at a median of 7.12X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
3 Top-Ranked Auto Retailers to Buy Now
Lithia: Lithia’s diversified product mix and multiple streams of income reduce its risk profile and position it for sales and profit growth. Its Driveway e-commerce program is helping it to further boost prospects. The firm’s strategic buyouts are fortifying its market share and portfolio. Lithia’s total expected annualized revenues acquired in 2022 so far have reached over $2.1 billion. LAD — being committed to maximizing shareholders’ wealth — increased its dividend in each of the last five years, with an annualized growth rate of 5.70%.
Lithia, which currently sports a Zacks Rank #1 (Strong Buy), has a VGM Score of A. The Zacks Consensus Estimate for its 2022 sales and earnings indicates a year-over-year uptick of 29.9% and 19.5%. Lithia steadily exceeded earnings expectations in the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: LAD
Penske: Penske engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. The buyout of Kansas City Freightliner, completed during second-quarter 2021, is expected to add $450 million to Penske’s annualized revenues. The McCoy acquisition, completed in November, is expected to bolster the top line of Penske’s PTG subsidiary. In 2021, the company hiked its quarterly dividend four times. So far this year, it has raised payout twice.
Penske, which currently sports a Zacks Rank #1, has a VGM Score of A. The Zacks Consensus Estimate for its 2022 sales and earnings indicates a year-over-year uptick of 10.5% and 13.7%, respectively. Penske managed to pull off an earnings beat in the last four quarters, with the average being 17.7%.
Price & Consensus: PAG
Group 1: 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. The company recently boosted its share repurchase authorization to $250 million. It also hiked its first-quarter 2022 dividend by 2.8%.
Group 1, which currently sports a Zacks Rank #1, has a VGM Score of A The Zacks Consensus Estimate for its 2022 earnings and sales indicates a year-over-year uptick of 23% and 20%, respectively. Group 1 surpassed earnings estimates in the preceding four quarters, the average surprise being 6.6%.
Price & Consensus: GPI
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3 Stocks to Bet On in an Upbeat Auto Retail Industry
The Zacks Auto Retail and Whole Sales industry is going great guns, thanks to continued vehicle demand coupled with rising average prices of both new and used cars. Auto retailers are benefiting from high vehicle margins, which are boosting their bottom line. Digitization is also yielding results and propelling the businesses to reach new heights. Multiple industry tailwinds augur well for industry participants including Lithia Motors (LAD - Free Report) , Penske Automotive (PAG - Free Report) and Group 1 Automotive (GPI - Free Report) . These stocks are registering impressive profits and cash flowsand remain committed to increasing shareholder value.
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 Investing Trends
Rising Vehicle Prices: While the demand for vehicles has been strong, automakers are reeling under severe chip crisis — a byproduct of COVID — worsened by the Russia-Ukraine war. This has disrupted supply chain system and adversely impacted the supply of new vehicles. The supply-demand mismatch is resulting in low inventory levels, which are leading to a spike in vehicle prices. Consequently, auto retailers are recording high vehicle margins, which are boosting their bottom line.
Digitization Ramp-Up: The process of buying cars has undergone a digital transformation, with online sales getting ever so popular. Auto dealers are ramping up e-commerce initiatives to make deals with customers and arranging for home deliveries of vehicles. The launch of a simple, secure and user-friendly online platform is aiding in seamless end-to-end digitization of the companies’ sales processes. With digitization gathering steam, auto retail companies are poised to reach new heights.
Shareholder-Friendly Moves: Thanks to solid cash generating potential amid high demand (especially for used cars), strong vehicle margins and e-commerce efforts, auto retailers are generating record profits. With increasing free cash flow is soaring, firms are actively boosting shareholder value via dividends and share buybacks. Noted auto retailers including Sonic, AutoNation, Lithia, Group 1 and Penske have resorted to dividend hikes and/or boosted buyback lately, instilling shareholders’ confidence
Zacks Industry Rank Indicates Bright Prospects
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 #4, which places it in the top 2% 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 Mar 31, 2022, the industry’s earnings estimates for 2022 have moved up 6.6%.
Before we present you a few top-ranked stocks to capitalize on the thriving prospects of the auto retail space, let’s take a look at the industry’s recent stock-market performance and the valuation picture.
Industry Tops Sector and S&P 500
The Zacks Auto Retail & Whole Sales industry has outperformed the Zacks S&P 500 composite as well as the Auto, Tires and Truck sector over the past year. The industry has gained 2.1% over this period compared with the S&P 500’s and the sector’s decline of 12.7% and 27.5%, 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.
On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 5.31X compared with the S&P 500’s 12.22X and the sector’s trailing 12-month EV/EBITDA of 17.06X.
Over the past five years, the industry has traded as high as 10.08X, as low as 4.28X and at a median of 7.12X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
3 Top-Ranked Auto Retailers to Buy Now
Lithia: Lithia’s diversified product mix and multiple streams of income reduce its risk profile and position it for sales and profit growth. Its Driveway e-commerce program is helping it to further boost prospects. The firm’s strategic buyouts are fortifying its market share and portfolio. Lithia’s total expected annualized revenues acquired in 2022 so far have reached over $2.1 billion. LAD — being committed to maximizing shareholders’ wealth — increased its dividend in each of the last five years, with an annualized growth rate of 5.70%.
Lithia, which currently sports a Zacks Rank #1 (Strong Buy), has a VGM Score of A. The Zacks Consensus Estimate for its 2022 sales and earnings indicates a year-over-year uptick of 29.9% and 19.5%. Lithia steadily exceeded earnings expectations in the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: LAD
Penske: Penske engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. The buyout of Kansas City Freightliner, completed during second-quarter 2021, is expected to add $450 million to Penske’s annualized revenues. The McCoy acquisition, completed in November, is expected to bolster the top line of Penske’s PTG subsidiary. In 2021, the company hiked its quarterly dividend four times. So far this year, it has raised payout twice.
Penske, which currently sports a Zacks Rank #1, has a VGM Score of A. The Zacks Consensus Estimate for its 2022 sales and earnings indicates a year-over-year uptick of 10.5% and 13.7%, respectively. Penske managed to pull off an earnings beat in the last four quarters, with the average being 17.7%.
Price & Consensus: PAG
Group 1: 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. The company recently boosted its share repurchase authorization to $250 million. It also hiked its first-quarter 2022 dividend by 2.8%.
Group 1, which currently sports a Zacks Rank #1, has a VGM Score of A The Zacks Consensus Estimate for its 2022 earnings and sales indicates a year-over-year uptick of 23% and 20%, respectively. Group 1 surpassed earnings estimates in the preceding four quarters, the average surprise being 6.6%.
Price & Consensus: GPI