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Auto Retail Stocks Shine as America Prepares for July 4

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The American Automobile Association (AAA) says that 47.7 million Americans are traveling this Independence Day weekend, the second highest volume on record. And most of it (91%) will be road trips (5% higher than the previous record for this holiday, set in 2019).

While air travelers are expected to be up 164% to reach 90% of the pre-pandemic volumes, traveling by bus, train and other modes of transport will be slower, rising 72% from last year. Bus travel in particular will be constrained by a shortage of drivers that could not be hired back in time, after they were laid off due to the pandemic last year.

These are encouraging numbers and clearly show the pent-up demand for travel and leisure after the restrictions imposed last year. And the mood has been reflected in the strong sales that auto retailers have been seeing of late. But despite these trends, investors have cooled off over the last couple of months because of the ongoing chip shortage that is leading to lower production, and therefore, supply constraints.

Obviously, supply constraints can be good for retailers only up to a point because they can ask more for their existing inventory. But of course, this can’t continue indefinitely. If the supply-demand imbalance is prolonged, there will eventually be a hit to both revenue and earnings.

The latest estimates from J.D. Power and LMC Automotive indicate that auto sales in June will be up 19.5% from pandemic-hit 2020, but remain 8.3% below June 2019 levels. Sales to individuals will however be up 0.3% from June 2019.

First half sales, while jumping 32% from last year, are expected to be 0.7% from 2019. As far as prices are concerned, the average transaction price of $40,206 is a record high, up from the previous record of $38,539 in May. So it isn’t all that bad news for retailers.

One thing that can help you decide whether it’s time to get back into auto retailers is the estimate revision trend. Another is the valuation. So let’s take a look at what these numbers say.

Looking at the estimate revision trend for the June and September quarters, it’s clear that estimates for both quarters have picked up strongly since April. While the estimated earnings for the June quarter are up 8.3%, the September quarter estimate is up 4.2%. However, the most recent estimates for both quarters are softer.

A look at the annual estimates shows that while the 2021 estimate is up 68.6% over the past year, the 2022 estimate is up 3.6%. There is no recent softening in these estimates.

Therefore, it appears that auto sales (and prices) picked up very strongly earlier this year, surprising analysts and leading them to raise estimates that are being adjusted right now because of an inventory concern.

Taking a look at the valuation, it appears that the industry is trading at 9.6X forward P/E, which is below its median level of 10.2X over the past year and of course trails the S&P 500’s 21.9X by a mile.

So yes, taken as a whole, the industry is seeing supply constraints and analysts do appear incrementally cautious. But auto retailers should benefit from prices that continue to rise. Moreover, not all auto dealers have their estimates moving south. Here are a few that are in fact moving in the opposite direction-

Zacks #2 (Buy)-ranked Asbury Automotive Group’s (ABG - Free Report) 2021 earnings estimate is up 18.7% in the last 90 days. Its 2022 estimate is up 10.9%. Its P/E of 10.2X is close to the median value over the past year.

#2-ranked AutoNation (AN - Free Report) has seen its 2021 P/E move up 35.7% and 2022 P/E move up 22.0% in the last 90 days. It is going for a P/E of 10.0X, well below its median value over the past year.

Group 1 Automotive, Inc. (GPI - Free Report) has a Zacks Rank #2 and also an attractive estimate revision trend. The earnings estimate for the year 2021 is up 17.8% in the last 90 days. The estimate for the following year is up 12.6%. The P/E of 7.6X is also below the median value.

#2-ranked Lithia Motors, Inc. (LAD - Free Report) has seen a 16.0% increase in its 2021 estimate and a 9.2% increase in its 2022 estimate. At 14.3X P/E, it is also trading below its median value over the past year.

Penske Automotive Group, Inc. (PAG - Free Report) also has a Zacks Rank #2. Its earnings estimates have also been moving steadily higher. In the last 90 days, the 2021 estimate jumped 17.2% and the 2022 estimate jumped 12.5%. Its 8.9X P/E is also below its median value over the past year.

Price Performance In The Last 3 Months

Zacks Investment ResearchImage Source: Zacks Investment Research


It appears that the general pessimism about the inventory shortage has pulled down the whole group, even the ones with improving outlooks. And as can be seen from the above examples, this has created an opportunity to invest.


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