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U.S. Used-Vehicle Market Red Hot: Stocks to Watch Out For

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With new cars getting expensive and out of reach for many shoppers, affordable used vehicles are becoming increasingly popular. The used car market has gained traction over the past few years and is poised to witness strong demand going forward. Despite the introduction of various models in a bid to bridge the gap between luxury and budget cars, the used car market has not come under any threat.

Used-Vehicle Market Outpacing New Vehicle Market

The auto sector, being consumer cyclical, is dependent on business cycles and economic conditions. However, historically, used vehicle sales have shown less volatile reactions to market shocks, offering a relatively safe harbor from the drastic high and low sales of new vehicles during boom and slump periods.

New emission standards, and rise in ride-sharing services and used car sales are weighing on the demand for new vehicle sales. Amid economic slowdown concerns and weak credit growth, consumers are getting more inclined toward used vehicles.

With a shift toward electric and self-driving vehicles, automakers are re-orienting their business models. Technological development with regard to electric, autonomous and connected cars demands huge investment, which is then passed on to consumers. Rising prices of new cars and low discounts to buyers have tamed consumer demand and consequently resulted in decline in new vehicle sales.

In addition to these, the lucratively priced, high-quality used vehicles inventory has prompted consumers to think about the alternatives of buying new cars. This resulted in higher demand for used vehicles and supported its prices through 2019.

Notably, digital revolution is disrupting used-car retailing. Increased use of dedicated online sites to sell used cars is having a positive impact on the used-car market. The presence of several online car sales sites has enabled buyers to pick a used car through online sites.

Data Validating the Used-Vehicle Market Boom

Per Statista data, the used-vehicle market was more than twice the size of the new vehicle market every year from 2000 to 2018 in the United States. Notably, the U.S. used and new vehicle sales in 2018 had amounted to 40.4 and 17.2 million units, respectively.

While full-year 2019 figures for used vehicle sales and average price have not been released yet, average selling price of used cars is also on the rise. Per National Automobile Dealer Association (“NADA”), the average transaction price for the same through the first six months of 2019 was $20,835, higher than the year-ago level of $20,390. According to NADA, average used-vehicle department sales in the first nine months of 2019 totaled $15.2 million, suggesting a3.7% year-over-year uptick. In contrast, average new vehicle department segment sales through the first nine months of 2019 had declined 1% year over year.

Per JD Power, dealers had generated average gross profit of $140 on a mass-market new car in 2019, whereas profit on used cars came in at $950. Further, used trucks made handsome profits of $1,200 per unit versus $540 each for new trucks.

What to Expect Down the Road

Rising prices for new vehicles and weakening credit conditions are likely to result in new vehicle sales decline in 2020 as well. Omni-channel retailing and high number of off-lease supply are anticipated to offer a wide variety of options to shoppers in the used-vehicle market.

The used car industry is highly fragmented and the situation is not expected to change anytime in 2020. Notably, the biggest used-vehicle retailer, CarMax KMX holds roughly 3% market share in the industry. This offers opportunity for new players to enter the market easily. However, competition is expected to remain high.

Used car demand from mass-market brands is expected to remain strong. In 2019, small and midsized cars witnessed stronger price appreciation than spacious vehicles like trucks or SUVs and the trend is likely to continue in 2020. While the share of trucks and SUVs in the used-vehicle market will continue to grow, higher supply of these vehicles coming back to market may lower their resale value.

Notably, the volume of off-lease vehicles returning to market peaked at $4.1 million this year. The inventory level in 2020 is expected to either remain stable or decline slightly. Per J.D. Power, 15.35-million used vehicles (upto five-years old) had returned to the market in 2019 and the company forecasts 15.28-million vehicles to come back to the market in 2020. While this does not suggest a huge decline, still the ebbing supply is likely to support the selling price of used vehicles.

Anticipated Beneficiaries

The automotive industry primarily consists of two types of companies — a handful of multinational auto giants and numerous retailers. While the first group is mainly engaged in the production of various types of vehicles, the latter deals with both new and used vehicles.

While highly-priced new vehicles — owing to mounting R&D costs — could deter debt-weary millennials to make big ticket purchases, the demand for used vehicles is likely to remain robust. This has brightened the prospects of the below-mentioned auto companies that deal in used cars.

Sonic Automotive, Inc. (SAH - Free Report) : The stock has more than doubled in the past 12 months and looks poised to continue its bull run in 2020.Markedly, Sonic’s pre-owned vehicle chain, EchoPark is growing. This is expected to boost the firm’s profitability, going forward. This Zacks Rank #1 (Strong Buy) firm expects sales and earnings to witness year-over-year growth of 8% and 16.1%, respectively, in fiscal 2020.You can see the complete list of today’s Zacks #1 Rank stocks here.

Penske Automotive Group, Inc. PAG: Penske is anticipated to benefit from acquisitions, and the opening of dealerships in the United States and European markets. The company’s product diversification, stand-alone used-vehicle supercenters and enhanced digital capabilities bode well. The Zacks Rank #2 (Buy) firm expects sales and earnings to grow 2.2% and 8.2% year over year in fiscal 2020.

CarMax: The Zacks Rank #3 (Hold) firm looks well poised to sustain previous year’s momentum in 2020, backed by store-expansion efforts and focus on the used-car market. The Zacks Consensus Estimate for fiscal 2020 and 2021 earnings indicates year-over-year improvement of 8.1% and 8.1%, respectively.

AutoNation, Inc. AN: One of the largest automotive retailers in the United States, AutoNation’s brand extension strategy of investing in technology, and adding distribution and collision centers bodes well. The Zacks Rank #3 firm’s fiscal 2020 earnings are expected to grow 10%.

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