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Used Vehicles on a Smooth Ride as New Cars Get Pricier

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Rising demand for used cars has come as a huge relief for dealers who were weighed down by concerns related to their declining prices. Prices of these cars were on the decline due to a number of lease expirations toward the end of 2017. Per a report by the Wall Street Journal, the widening gap between new and used vehicles in recent times is pushing more and more shoppers toward used vehicles. This, in turn, is putting tremendous pressure on new vehicle manufacturers and the situation requires them to extend deeper discounts to remain competitive.

Widening Price Gap

Consumers’ changing preference from small passenger cars toward expensive and roomier sport-utility vehicles (SUVs) and trucks can be attributed to rise in average expenses on new vehicles purchase. Per Edmunds.com, as cited in the Wall Street Journal, in December last year, average price paid for a vehicle reached its all-time high of $36,848 and is currently near its record level. Moreover, given the current uncertainty around trade, prices of new vehicles are likely to rise further.

The rising price of new vehicles, consumers’ preference for roomier SUVs and crossovers, and Americans’ habit of changing vehicles every five to six years have resulted in high demand for used automobiles. The prospects of new vehicles have been further hurt by an increasing interest rate environment.

Rising rate of interest can put a lid on the deep discounts by automakers as the opportunity cost of offering a low or no-interest loan is much higher in a high interest rate environment. (Read more: Rising Interest Rates Put Brakes on No-Interest Auto Loans)

Meanwhile, prices of used vehicles have also increased. But the gap between the price of a pre-owned and a brand new automobile has widened in recent times, thereby making the case stronger for used cars, per car-shopping website Edmunds.com.

The Likely Beneficiaries

The gap in the value of new and pre-owned vehicles is likely to benefit companies such as Penske Automotive Group, Inc. (PAG - Free Report) , AutoNation, Inc. (AN - Free Report) , CarMax, Inc. (KMX - Free Report) , and Sonic Automotive, Inc. (SAH - Free Report) , which deal in used vehicles.

All these companies witnessed moderate growth in revenues in their most recent quarters with Penske Automotive posting the best figure of 10.4% year-over-year growth and AutoNation witnessing the lowest year-over-year revenue growth of 2%. CarMax and Sonic Automotive witnessed revenue growth of 5.5% and 4.2%, respectively. The higher demand for used vehicles is likely to add to their sales going forward.

Currently, while Penske Automotive carries a Zacks Rank #2 (Buy), Sonic Automotive, CarMax and AutoNation carry a Zacks Rank #3 (Hold). Moreover, Sonic Automotive, AutoNation, Penske Automotive and CarMax have an expected long-term growth rate of 2.3%, 6.7%, 6.8% and 17%, respectively.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Penske Automotive, CarMax and AutoNation have a VGM Score of A, while Sonic Automotive has a VGM Score of B.

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