Back to top

Image: Bigstock

Auto Market Quite Resilient Right Now: Here's Why

Read MoreHide Full Article

Amid the bad news in the Conference Board’s consumer confidence survey for June was one line that drew my attention: “Purchasing intentions for cars, homes, and major appliances held relatively steady.”

Cars in particular still seem to be in demand. At least that is the feeling you get from commentary coming out of the major auto retailers. AutoNation (AN - Free Report) , Group 1 Automotive (GPI - Free Report) , Lithia Motors (LAD - Free Report) and Penske Automotive Group (PAG - Free Report) management have all said on their respective earnings conference calls that the greatest deterrent to higher new vehicle sales was the supply chain.

In fact, all these auto dealers have no new vehicle inventory. In Penske’s case, vehicles are sold well before they enter the lot. Group 1 and Penske management explain that this is attributable to pent-up demand as new vehicle sales have been very low in the last couple of years. So companies are seeing their order backlogs build up, some going into 2023.

Luckily for the auto retail industry, players are not limited to new vehicle sales. Most derive a larger percentage of their revenue from used vehicle sales. The used vehicle business depends on a couple of factors: first, the ability to acquire vehicles at reasonable prices and second, the ability to quickly refurbish and put back on sale.

The visible trend among the top players is to acquire directly from end users. This could reduce the acquisition cost and time to acquisition by eliminating the middle man, often the fleet owners.

AutoNation is optimistic about its ability to build used vehicle inventories because of an efficient sourcing system and its own refurbishing skills. Management says that 94% of its used vehicles are acquired directly from consumers.

Similarly, Group 1’s strategy is to acquire used vehicles through its AcceleRide digital marketplace for vehicles. In the last quarter, it recorded a nearly 300% increase in vehicle sourcing through AcceleRide. Lithia Motors uses the same strategy, acquiring through its digital platform Driveway.

And CarShop, the online platform formed as a result of an arrangement between Penske and Cox Automotive is doing pretty much the same thing. Lithia Motors also has a dedicated online platform for energy conscious customers. Its GreenCars marketplace as it is called tells interested customers how they could acquire EVs and related goods and services.

Operating an online platform is also beneficial in other ways. Most people are used to researching online the item they are looking to buy. So this way, the dealers can pick up some advertising revenue while also hooking up their customers to the OEMs themselves. This could be an advantage in speeding up the booking process, especially when inventories are running so low.  

Additionally, one of the biggest growth drivers for auto dealers in recent times has been the aftermarket. Even when sales disappoint, as they are likely to do when there’s inadequate inventory, or when people are trying to save money, the need to repair/refurbish or otherwise service whatever transportation they own becomes even more important. So, it is a kind of a hedge.

Because of all these positives, AutoNation, Group 1, Lithia Motors and Penske Automotive continue to see rising estimates. And this is translating into Zacks #1 (Strong Buy) ratings on these shares.

One-Month Price Performance

Zacks Investment Research
Image Source: Zacks Investment Research