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Why Americans Keep Buying Cars & How to Invest for It

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As the pandemic wreaked havoc on the world, the automotive market is one that took it on the chin. Not only did automakers have to shut down production along with a large chunk of others, they also had to contend with much softer demand as people tried to stay indoors as much as possible.

But this situation quickly gave way to one that turned out to be very positive for the entire sector. Because while the pandemic made it hard for people to get out, it very quickly became clear that if you didn’t want to get infected, the best way to move around was with your own transportation.

So people scrapped all their other travel plans and took to the road instead. Whether for work or pleasure, more people are taking the road. This trend continues to date.   

However, it’s also true that many people lost their jobs and some also had to take pay cuts. And while the economy does appear to be coming around, the need for a second stimulus is a reality because there are still many segments like restaurants, airlines, cruise ships and many service providers that can’t predict when they will return to normalcy. A vaccine will help no doubt, but broad availability is still some way off.

This has led to particularly strong demand for used cars (which is anyway the bigger market). New cars have been slower to come back partly because of weaker demand and partly because of disruptions and safety protocols at factories that continue to slow down production. So companies dealing in used cars (that would include practically all the big dealers) were quick to see the positive change.

Another thing that has played a big role in car purchases is the extent of digitization provided by the seller. Customers increasingly want to avoid personal contact while selecting or paying/arranging finance. So there’s a growing wave of people opting for digital channels. Digital startups and new companies like Vroom (VRM - Free Report) and Carvana (CVNA - Free Report) have benefited from this trend.

But the more established players are also pulling up their socks. Those that had already invested in the space, such as AutoNation (AN - Free Report) , which picked up a stake in Vroom or Penske that bought CarSense (mainly for its online sales platform) are naturally better positioned to serve a market that suddenly wants to do everything digitally. But others continue to add/improve their digital offerings.

Here are a few stocks to make the most of the above trends-

Americas CarMart, Inc. (CRMT - Free Report)

America's Car-Mart is one of the largest retailers of used cars with dealerships primarily in small cities and rural locations across the South-Central United States.

This Zacks Rank #2 (Buy) company has a Value Score A, Growth Score F and Momentum Score A.

However, despite the low growth score, analysts are rather positive about CRMT. As a result, its earnings estimate for the current year ending April 2021 is up 88 cents (9.2%) in the last 30 days.

Moreover, CRMT is expected to grow revenue 13.9% this year and 4.3% in the next, with earnings growing at a respective 41.8% and 3.6%.

What’s more, the shares are trading at 9.71X forward earnings, below the median value of 11.50X, meaning that they are undervalued.

Penske Automotive Group, Inc. (PAG - Free Report)

Penske Automotive Group has automotive and commercial truck dealerships in the U.S., Canada and Western Europe. It also has operations in Australia and New Zealand.

One of the largest players in the space, this Zacks Rank #1 (Strong Buy) company currently has a Value Score B, Growth Score A and Momentum Score A.

So taking a look at the recent estimate revision history, we see that analysts have made substantial revisions to their earnings estimates for the current and 2021 fiscal years. Accordingly, the Zacks Consensus Estimate for 2020 is up $1.67 (38.6%) while that for 2021 is up 70 cents (12.2%).

The pandemic took an initial toll on its business, but things started looking up in the September quarter. As a result, analysts currently expect a revenue decline of 11.7% this year that won’t quite be made up in the next. However, earnings will grow 13.6% and 7.3%, respectively.

This may not be just a question of better cost management because I’m seeing a larger number of earnings estimates than revenue estimates in the consensus. So it seems likely that the more optimistic analysts haven’t provided revenue estimates or that these haven’t been included in the consensus.

PAG shares are currently trading at their median value of 9.22X forward earnings over the past year. Given the rank and scores, there should be more room to run.

Group 1 Automotive, Inc. (GPI - Free Report)

Group 1 is one of the leading automotive retailers in the world. Through its 17 dealerships the firm sells new and used cars and light trucks. It also takes care of vehicle financing and insurance and service contracts; maintenance and repair services; and sale of replacement parts and aftermarket automotive products.

This Zacks Rank #1 company has a Value Score C, Growth Score C and Momentum Score F, so there must be some risks to investing in the shares. Let’s take a look at the numbers-

Estimates for the year ending December 2020 are up $1.44 (9.0%) and for the year ending 2021 are up $1.38 (8.8%). This represents a 59.9% increase in 2020 earnings and a 2.3% increase in 2021 earnings. 2021 revenue is also currently expected to be below 2019 levels.

Granted that there’s still a long time left for 2021-end and that some revenue estimates may be missing in this case as well. And given the rate at which estimates are going up, there’s good reason to think actual numbers will be much higher. Still, the numbers indicate significant uncertainty, if nothing else.

But since the shares are trading at 7.29X forward earnings, which is below the median of 7.66X over the past year, they are undervalued.

                                                                                                     

Rush Enterprises, Inc. (RUSHA - Free Report)

Rush Enterprises operates the largest network of Peterbilt heavy-duty truck dealerships in North America and John Deere construction equipment dealerships in Texas and Michigan. It sells new and used heavy-duty trucks and construction equipment; aftermarket parts, service and body shop facilities; and a wide array of financial services.

This Zacks Rank #1 company has a Value Score B, Growth Score B and Momentum Score C, so it looks like a good pick.

I’m seeing substantial revision to the Zacks Consensus Estimates for both 2020 and 2021. For 2020 it’s up 77 cents (71.3%) and for 2021, it’s up 78 cents (53.8%).

Revenue estimates for this company aren’t available, but the earnings estimates indicate a 26.3% decline this year, followed by a 20.3% increase in the next, which is however, still below 2019 levels.

At 17.65X forward earnings, the shares are a below the median level of 18.82X, so they are undervalued.

Asbury Automotive Group, Inc. (ABG - Free Report)

Asbury Automotive is a large automotive retailer Asbury offers new and used vehicle sales and related financing and insurance, vehicle maintenance and repair services, replacement parts and service contracts among other things.

This Zacks Rank #2 company has a Value Score A, Growth Score A and Momentum Score B. So far so good.

The current year earnings estimate is up 52 cents (4.4%) and that for next year is up 59 cents (4.3%).

Revenue is expected to be down 1.2% this year and up 23.1% in the next. Earnings are expected to be up 31.5% this year and up 13.9% in the next.

Additionally, its 8.68X forward P/E multiple is below the median value of 9.19X over the past year, which makes the shares undervalued. So go for them!

Conclusion

The estimate revision trend seems to indicate that analysts aren’t yet able to lay their fingers on the exact nature and pace of the recovery and its impact on the various players. That’s why we are still seeing such conservative estimates. Obviously, this has meant that most companies are beating by wide margins and estimates for the out quarters are seeing big upward revisions.

Also, we are currently seeing most of the demand coming from the used car market. Once production gets back up to speed and more consumers feel they can spend on a new car, there should be an uptick in that. Of course, that could also mean that used cars will take a back seat then.

Whatever be the case, it looks as if the uncertainty isn’t over yet although we are surely coming out of the pandemic. A vaccine can only make things better.

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