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Zacks Industry Outlook Highlights AutoNation and Rush Enterprises

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For Immediate Release

Chicago, IL – May 30, 2024 – Today, Zacks Equity Research discusses AutoNation (AN - Free Report) and Rush Enterprises (RUSHA - Free Report) .

Industry: Auto - Retail & Wholesale


The Zacks Auto Retail and Wholesale industry faces a subdued outlook due to concerns over slowing vehicle sales growth, as much of the pent-up demand was absorbed in 2023. High auto loan rates are likely to cause prospective buyers to delay purchases. Although attractive incentives provide some relief to consumers, they could impact retailers' profit margins.

Additionally, slower-than-expected adoption of electric vehicles (EVs) is expected to constrain sales further. Amid these intricate industry dynamics, auto retailers such as AutoNation and Rush Enterprises appear better positioned to address challenges, thanks to their strategic expansion initiatives and shareholder-friendly moves.

Industry Overview

The automotive sector's performance depends on 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 the sale of new and used vehicles, light trucks as well as auto parts, execution of repair and maintenance services, along with the arrangement of vehicle financing.

The industry, being consumer cyclical, is dependent on business cycles and economic conditions. Consumers and businesses spend more on big-ticket items when they have higher disposable income. On the contrary, when income is tight, discretionary expenses are the first to be slashed. Importantly, the coronavirus pandemic has brought considerable changes in the operating environment, with the industry laying more emphasis on e-commerce retailing.

Key Themes to Consider

High Vehicle Financing Costs: While demand for vehicles has held its ground so far, affordability concerns are rising due to elevated borrowing costs driven by the Federal Reserve's hawkish stance. Since July 2023, the U.S. central bank has maintained its key overnight interest rate at a 23-year high, signaling that rates will remain elevated until inflation consistently moves toward the target range.

Although U.S. inflation cooled for the first time in six months last month, many officials emphasized the need for caution before adjusting rates. The high borrowing costs, combined with an expected slowdown in vehicle sales growth as pent-up demand from 2023 subsides, signal a somewhat muted outlook for the auto retail industry.

Slower-Than-Expected EV Sales: The anticipated rapid growth in EV sales is encountering obstacles. High prices of many new EV models and consumer hesitancy to switch to battery power due to concerns about charging infrastructure have hindered adoption. In response to these market dynamics, automakers like General Motors and Ford have adjusted production targets and postponed some electric models. Lower-than-expected consumer adoption of EVs will reduce the overall sales volumes.

Declining Vehicle Margins: Per GlobalData estimates, inventory levels rose to more than 2.6 million vehicles at the end of last month. Amid the rising inventory, automakers and dealers are ramping up incentives and sweetening deals. The average incentive per vehicle surged 81% from April 2023 to $3,087 last month. This surge in incentives reflects a shift toward a buyer's market, placing increased pressure on retailers. While consumers may benefit from such deals and discounts, auto retailers are grappling with squeezed profit margins.

Investor-Friendly Movies: Despite broader market concerns, many industry participants are committed to returning value to shareholders via buybacks and dividends. These auto retailers are benefiting from acquisitions, store expansions and cost-cut efforts, thereby generating ample cash flow to cheer investors through robust share purchases and dividend hikes.

Zacks Industry Rank Not So Encouraging

The Zacks Auto Retail & Whole Sales industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #222, which places it in the bottom 11% of around 250 Zacks industries.

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates glum near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group's earnings growth potential. Since the beginning of the year, the industry's earnings estimates for 2024 have contracted around 12.9%.

Before we present a few stocks that you may still add to your watchlist, let's take a look at the industry's recent stock-market performance and valuation picture.

Industry Lags S&P 500 But Tops Sector

The Zacks Auto Retail & Whole Sales industry has underperformed the Zacks S&P 500 composite but outperformed the Auto, Tires and Truck sector over the past year. The industry has gained 8.8% over this period compared with the S&P 500's growth of 26.2%. Meanwhile, the sector has declined 3%.

Industry's Current Valuation

Since automotive companies are debt-laden, it makes sense to value them based on the enterprise value/earnings before interest tax depreciation and amortization (EV/EBITDA) ratio.

On the basis of the trailing 12-month EV/EBITDA, the industry is currently trading at 6.77X compared with the S&P 500's 14.65X and the sector's trailing 12-month EV/EBITDA of 14.49X.

Over the past five years, the industry has traded as high as 10.71X, as low as 4.35X and at a median of 6.82X.

2 Stocks to Keep an Eye On

Rush Enterprises: It is a leading provider of solutions to the commercial vehicle industry. The company is known for the ownership and operation of Rush Truck Centers, the largest network of commercial vehicle dealerships across North America. With over 150 locations spanning 23 states and Ontario, Canada, including 125 franchised dealership locations, Rush is a dominant force in the industry.

In the last reported quarter, Rush Enterprises experienced healthy growth in aftermarket demand, specifically from customers in the public sector, the refuse (waste management) industry and those involved in medium-duty vehicle leasing. Strong FCF generation, disciplined expense management approach and investor-friendly moves are praiseworthy. Rush Enterprises has increased its payout seven times in the last five years, with an average annualized growth rate of 30.4%.

Rush Enterprises sports a Zacks Rank #1 and has a VGM Score of A. The consensus mark for 2024 EPS has moved north by 5 cents in the past seven days. The consensus mark for 2025 EPS has moved north by 45 cents in the past 60 days. RUSHA surpassed estimates in the trailing four quarters, the average being 11.2%.

You can see the complete list of today's Zacks #1 Rank stocks here.

AutoNation: It is one of the largest automotive retailers in the United States. The company's diversified product mix and multiple streams of income lower its risk profile and augur well for earnings and sales growth. The launch of AutoNation Express, facilitating online vehicle buying and selling, signifies a significant digitization leap. Strategic acquisitions like Priority 1 Automotive, Peacock Automotive's 11 dealerships, CIG Financial and RepairSmith are driving the company's prospects.

The adoption of digital solutions has enhanced its market presence and revenues. Encouragingly, AutoNation's Finance division is consistently improving in various aspects, including higher penetration in its stores, better profitability and lower delinquency rates. The company's commitment to returning shareholder value boosts investors' confidence. Last month, AN authorized an additional $1 billion in shares under its repurchase program.

AutoNation currently carries a Zacks Rank #3 (Hold) and has a VGM Score of A. The company's growth is forecast to cool down in 2024, with the Zacks Consensus Estimate for EPS of $18.44 suggesting a 19.8% year-over-year decline on a 0.5% contraction in sales. Growth is expected to resume modestly in 2025, as consensus expectations suggest a 5.33% recovery in EPS on 1.33% higher sales. AN surpassed estimates in the trailing four quarters, the average being 3.6%.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit  for information about the performance numbers displayed in this press release.

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