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 Whole Sales 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.  This is mainly because consumers and businesses spend more on discretionary items when they have higher disposable income. Consumer spendingin the United States remains healthy, led by record low unemployment rate, wage growth and job additions. Investors should expect the economy to continue to expand at a steady pace n the near term. The current low interest environment should lead to more money being injected into the economy, inducing businesses to invest and consumers to spend and borrow. What’s more, the Fed is expected to keep its monetary policy on hold after trimming rates three consecutive times last year to stimulate the economy.These positive economic indicators in the United States bode well for the Auto Retail and Wholesale industry.

 

• Trade tensions between the world’s two largest economies took a toll on auto sales. The trade tiff seems to be easing now with the United States and officially signing the phase-one trade deal on Jan 15, 2020.The deal is likely to mark the start of more comprehensive agreements between the two countries. Nonetheless, according to CAAM, the auto industry in China, the world’s largest auto market, is expected to witness a 2% fall in vehicles sales this year, which would mark the third straight year of sales decline. In addition to a weak economic outlook, tighter terms for vehicle financing, possibility of re-escalation of global trade tensions and increasing popularity of ride-sharing platforms might weigh on car sales. China auto market slump remains a concern for the industry.

 

• 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 Encouraging Prospects

The Zacks Auto Retail & Whole Sales industry is a nine-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #40, which places it in the top 16% 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 & Whole Sales 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 29.4% over this period compared with the S&P 500 and sector’s rise of 23.8% and 9.1%, 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. 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 7.40X compared with the S&P 500’s 12.12X and the sector’s trailing12-month EV/EBITDA of 8.64.

Over the past five years, the industry has traded as high as 9.71X, as low as 6.21X and at a median of 7.60X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

 

 

Bottom Line

Analysis shows that there are bright spots such as a good industry rank and cheap valuation for the Zacks Auto Retail & Whole Sales industry. Also, a stable U.S. economy, Fed’s dovish stance and conducive labor market are positives. However, weak economic conditions in China may play a spoilsport.

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 one stock with a Zacks Rank #1 (Strong Buy) and three stocks 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.

America’s Car-Mart, Inc. (CRMT Quick QuoteCRMT - Free Report) ): America's Car-Mart operates automotive dealerships and is one of the largest automotive retailers in the United States, focused exclusively on the Buy Here/Pay Here segment of the used car market. The company sports a Zacks Rank #1 and has an expected earnings growth rate of 25.89% for fiscal 2020.

Price and Consensus: CRMT

Group 1 Automotive (GPI Quick QuoteGPI - Free Report) ): Texas-based Group 1 Automotive is one of the leading automotive retailers in the world. The company carriesa Zacks Rank #2 and has an expected earnings growth rate of 7% for fiscal 2020.

Price and Consensus: GPI

Sonic Automotive (SAH Quick QuoteSAH - 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 16.6% for fiscal 2020.

Price and Consensus: SAH

AutoNation, Inc. (AN Quick QuoteAN - Free Report) : The company is the largest automotive retailer in the United States. The company carries a Zacks Rank #2 and has an expected earnings growth rate of 11.2% for fiscal 2020.

Price and Consensus: AN

 

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