The performance of the automotive sector depends upon its retail and wholesale network. Through dealership and retail chains, companies in the Zacks Auto Retail and Wholesale industry carry out several tasks. These include sale of new and used vehicles and light trucks, sale of auto parts, execution of repair and maintenance services, and arrangement of vehicle financing.
Let’s take a look at the industry’s three major themes:
- The Auto Retail & Whole Sales industry, being consumer cyclical, is dependent on business cycle and economic conditions. Stocks within this industry perform well when the economy is expanding and witness a downturn when the economy is contracting. This is mainly because consumers and businesses spend more on discretionary items when they have higher disposable income. On the contrary, when the income is tight, discretionary expenses are the first to be slashed. With growing consumer disposable income, spending is on the rise, which is aiding the industry’s growth. Notably, real consumer spending rose 0.4% in July, after increasing 0.2% in June. It is anticipated that industry revenues will reflect this trend and grow further.
- Further, the latest employment data for the month of August reflect robust wage growth and job additions along with low unemployment rates, signaling optimism about the U.S. economy. Federal rate cut also provided a boost. It is worth noting here that the Federal Reserve cut interest rate for the first time since 2008 at the FOMC meeting in July 2019. Now, the key interest rate stands in the 2.00-2.25% range following a cut of 25 basis points. Analysts expect the Fed to cut rates further in 2019. Lower rates lead to more money being injected into the economy, inducing businesses to invest and consumers to spend and borrow. Interest rates on auto loans are likely to reduce, which bodes well for the industry. However, the US-Sino trade tiff has spooked financial markets and resulted in an inversion of the yield curves, which may put a brake on economic expansion in the near future.
- The Auto Retail & Whole Sales industry is witnessing considerable changes in the operating environment. Widespread usage of technology and rapid digitalization are resulting in fundamental restructuring of the automotive market. A shift toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. A host of factors such as pollution issues, technical superiority, stricter fuel-emission standards and increasing adoption by both automakers and customers have turned the fortunes in favor of electric vehicles. Fast progress in artificial intelligence and machine learning is making the seemingly utopian concept of driverless cars a reality. Considering the changing dynamics, there has been a radical change in the business models of auto companies.
Zacks Industry Rank Indicates Healthy Prospects
The Zacks Auto Retail & Wholesale industry is a nine-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #6, 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 strong 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 positive earnings outlook for the constituent companies in aggregate.
Before we present a few Auto Retail & Wholesale 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 Outperforms Sector and S&P 500
The Zacks Auto Retail & Wholesale industry has outperformed the Auto, Tires and Truck sector, as well as the Zacks S&P 500 composite over the past year.
The industry has moved up 7.3% over this period compared with the S&P 500’s rise of 2.3%. In contrast, the broader sector has declined 10.6%.
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. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 7.11X compared with the S&P 500’s 10.89X and the sector’s trailing-12-month EV/EBITDA of 9.33X.
Over the past five years, the industry has traded as high as 9.71X, as low as 6.21X and at a median of 7.71X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Analysis shows that there are certain bright spots such as a good industry rank and cheap valuation for the Zacks Auto Retail & Wholesale industry. Also, a robust economy and conducive labor market are positives.
While the economy is on track now with increasing consumer disposable income, wage growth and healthy employment levels, the risk to economic expansion is mounting because of the rising tariff war between the United States and China. While the Fed rate cut is a bonus, as it lowers interest expense, it remains to be seen what happens to rates during the rest of 2019.
The tech-savvy millennial generation is the chief driver of sustainable and convenient mobility solutions. Auto companies have to rethink their business model and focus their attention on users. Fast and widespread reorganization of the automotive sector is likely to have far-reaching impacts on the industry and its value chain.
We are presenting three stocks with a Zacks Rank #1 (Strong Buy) and one stock with Zacks Rank #2 (Buy) that are well positioned to grow. You can see the complete list of today’s Zacks #1 Rank stocks here.
Group 1 Automotive (GPI - Free Report) :
Texas-based Group 1 Automotive is one of the leading automotive retailers in the world. The company sports a Zacks Rank #1 and has an expected earnings growth rate of 15.38% for 2019.
Price and Consensus: GPI
Sonic Automotive (SAH - Free Report) :
Sporting a Zacks Rank #1, Sonic Automotive is also one of the leading automotive retailers in the United States. The firm expects its earnings to grow 32.20% year over year in 2019.
Price and Consensus: SAH
Asbury Automotive Group (ABG - Free Report) :
One of the largest automotive retailers, Asbury Automotive is headquartered in Georgia. It sports a Zacks Rank #1. The firm expects its earnings to grow 10.46% year over year in 2019.
Price and Consensus: ABG
Lithia Motors (LAD - Free Report) :
Oregon-based Lithia Motors is one of the leading automotive retailers of new and used vehicles, and related services in the United States. The company carries a Zacks Rank #2 and has an expected earnings growth of 12.83% for 2019.
Price and Consensus: LAD