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3 Auto Retail Stocks to Buy Now as Inventory Levels Improve
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The Zacks Auto Retail and Whole Sales industry is thriving, thanks to pent-up vehicle demand and sales with inventory levels improving. Additionally, new vehicle prices are still high, aiding margins of auto retailers. Digitization is also yielding results and propelling businesses to reach new heights. Companies are registering impressive profits and cash flows and remain committed to increasing shareholder value. Multiple industry tailwinds augur well for industry participants, including Penske Automotive (PAG - Free Report) , AutoNation Inc. (AN - Free Report) and Asbury Automotive (ABG - Free Report) .
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.
Factors Aiding the Industry
Strong Vehicle Demand Despite Economic Concerns: U.S. vehicle sales are off to a decent start this year. Cox Automotive expects U.S. auto sales to have grown around 6% year over year in the first quarter of 2023. Despite economic headwinds and interest rate hikes, pent-up demand has boosted sales as inventory continues to improve, providing customers with more choices. Inventories have surged approximately 70% from the early months of 2022.A recession may be on the horizon but one can’t see the signs of it in the vehicle market just yet. Most auto biggies have reported year-over-year sales growth in first-quarter deliveries.
E-Commerce Ramp Up: Digitization has been in high gear and the trend is here to stay. 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 auto retailers ramping up their omni-channel marketing, companies are poised to reach new heights.
New Vehicle Prices Remain High: The average price of a new vehicle is still somewhere around $49,000, per Kelley Blue Book. To put it in perspective, the average transaction price for a new vehicle was $37,876 prior to the pandemic. Amid high sticker prices, auto retailers are recording stronger margins, which are boosting their bottom line.
Robust Cash Flows Supporting Investor-Friendly Moves: Strong vehicle margins, robust demand and enhancement of digitization capabilities 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.
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 #18, which places it in the top 7% of around 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. Over the past three months, the industry’s earnings estimates for 2023 have moved up 1.2%.
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 14.9% over this period in contrast to the S&P 500 and sector’s decline of 10% and 41.2%, 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 5.33X compared with the S&P 500’s 12.51X and the sector’s trailing 12-month EV/EBITDA of 9.15X.
Over the past five years, the industry has traded as high as 10.09X, as low as 4.25X and at a median of 6.65X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
3 Auto Retailers to Pick Now
Penske:The company engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. Penske is riding high on strategic acquisitions. It has become the largest dealership group for Freightliner in North America with the Warner Truck Centers buyout. The buyouts of Kansas City Freightliner, McCoy and Team Trucks Centers are boosting Penske’s top line. In addition to its low leverage of 27%, Penske has more than $1.1 billion in liquidity.In 2022, the company hiked its quarterly dividend four times. In January 2023, it hiked its payout by 7%. In February, Penske boosted its buyback authorization by $250 million.
Penske currently sports a Zacks Rank #1 (Strong Buy) and Value Score of A. The Zacks Consensus Estimate for its 2023 and 2024 EPS has moved north by 54 cents and $1.85, respectively, over the past 60 days. Penske managed to pull off earnings beat in the last four quarters, with the average being 11%.
AutoNation: It is one of the largest automotive retailers in the United States. Its diversified product mix and multiple streams of income reduce risk profile and augur well for sales growth. Strong footprint, large dealer network and aggressive store expansion efforts along with brand extension strategy and alliances are praiseworthy. With the launch of its digital platform AutoNation Express, the company has stepped up its digitization game. AutoNation posted record fourth-quarter EPS. Thanks to solid income generation, the firm is committed to shareholder value maximization, boosting investors’ confidence. In 2022, AutoNation repurchased 15.6 million shares.
AutoNation currently carries a Zacks Rank #2 (Buy) and has a Value Score of A. The Zacks Consensus Estimate for its 2023 and 2024 EPS has moved north by 96 cents and $2.63, respectively, over the past 60 days. AutoNation managed to pull off earnings beat in three of the last four quarters and missed once, with the average being 5%.
Price & Consensus: AN
Asbury: It is one of the noted 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 added nearly $5.7 billion in 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 $2.5 billion in sales in 2023.For full-year 2022, Asbury repurchased approximately 1.6 million shares for $287 million. In January 2023, it boosted its buyback authorization by $108 million to $200 million.
Asbury currently carries a Zacks Rank #2 and has a Value Score of A. The Zacks Consensus Estimate for its 2023 and 2024 EPS has moved north by 26 cents and 18 cents, respectively, over the past 60 days. Asbury managed to pull off an earnings beat in the last four quarters, with the average being 7%.
Price & Consensus: ABG
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3 Auto Retail Stocks to Buy Now as Inventory Levels Improve
The Zacks Auto Retail and Whole Sales industry is thriving, thanks to pent-up vehicle demand and sales with inventory levels improving. Additionally, new vehicle prices are still high, aiding margins of auto retailers. Digitization is also yielding results and propelling businesses to reach new heights. Companies are registering impressive profits and cash flows and remain committed to increasing shareholder value. Multiple industry tailwinds augur well for industry participants, including Penske Automotive (PAG - Free Report) , AutoNation Inc. (AN - Free Report) and Asbury Automotive (ABG - Free Report) .
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.
Factors Aiding the Industry
Strong Vehicle Demand Despite Economic Concerns: U.S. vehicle sales are off to a decent start this year. Cox Automotive expects U.S. auto sales to have grown around 6% year over year in the first quarter of 2023. Despite economic headwinds and interest rate hikes, pent-up demand has boosted sales as inventory continues to improve, providing customers with more choices. Inventories have surged approximately 70% from the early months of 2022.A recession may be on the horizon but one can’t see the signs of it in the vehicle market just yet. Most auto biggies have reported year-over-year sales growth in first-quarter deliveries.
E-Commerce Ramp Up: Digitization has been in high gear and the trend is here to stay. 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 auto retailers ramping up their omni-channel marketing, companies are poised to reach new heights.
New Vehicle Prices Remain High: The average price of a new vehicle is still somewhere around $49,000, per Kelley Blue Book. To put it in perspective, the average transaction price for a new vehicle was $37,876 prior to the pandemic. Amid high sticker prices, auto retailers are recording stronger margins, which are boosting their bottom line.
Robust Cash Flows Supporting Investor-Friendly Moves: Strong vehicle margins, robust demand and enhancement of digitization capabilities 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.
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 #18, which places it in the top 7% of around 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. Over the past three months, the industry’s earnings estimates for 2023 have moved up 1.2%.
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 14.9% over this period in contrast to the S&P 500 and sector’s decline of 10% and 41.2%, 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 5.33X compared with the S&P 500’s 12.51X and the sector’s trailing 12-month EV/EBITDA of 9.15X.
Over the past five years, the industry has traded as high as 10.09X, as low as 4.25X and at a median of 6.65X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
3 Auto Retailers to Pick Now
Penske:The company engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. Penske is riding high on strategic acquisitions. It has become the largest dealership group for Freightliner in North America with the Warner Truck Centers buyout. The buyouts of Kansas City Freightliner, McCoy and Team Trucks Centers are boosting Penske’s top line. In addition to its low leverage of 27%, Penske has more than $1.1 billion in liquidity.In 2022, the company hiked its quarterly dividend four times. In January 2023, it hiked its payout by 7%. In February, Penske boosted its buyback authorization by $250 million.
Penske currently sports a Zacks Rank #1 (Strong Buy) and Value Score of A. The Zacks Consensus Estimate for its 2023 and 2024 EPS has moved north by 54 cents and $1.85, respectively, over the past 60 days. Penske managed to pull off earnings beat in the last four quarters, with the average being 11%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: PAG
AutoNation: It is one of the largest automotive retailers in the United States. Its diversified product mix and multiple streams of income reduce risk profile and augur well for sales growth. Strong footprint, large dealer network and aggressive store expansion efforts along with brand extension strategy and alliances are praiseworthy. With the launch of its digital platform AutoNation Express, the company has stepped up its digitization game. AutoNation posted record fourth-quarter EPS. Thanks to solid income generation, the firm is committed to shareholder value maximization, boosting investors’ confidence. In 2022, AutoNation repurchased 15.6 million shares.
AutoNation currently carries a Zacks Rank #2 (Buy) and has a Value Score of A. The Zacks Consensus Estimate for its 2023 and 2024 EPS has moved north by 96 cents and $2.63, respectively, over the past 60 days. AutoNation managed to pull off earnings beat in three of the last four quarters and missed once, with the average being 5%.
Price & Consensus: AN
Asbury: It is one of the noted 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 added nearly $5.7 billion in 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 $2.5 billion in sales in 2023.For full-year 2022, Asbury repurchased approximately 1.6 million shares for $287 million. In January 2023, it boosted its buyback authorization by $108 million to $200 million.
Asbury currently carries a Zacks Rank #2 and has a Value Score of A. The Zacks Consensus Estimate for its 2023 and 2024 EPS has moved north by 26 cents and 18 cents, respectively, over the past 60 days. Asbury managed to pull off an earnings beat in the last four quarters, with the average being 7%.
Price & Consensus: ABG