Auto Retail and Whole Sales
Lithia Motors
LAD
Penske Automotive
PAG
AutoNation
AN
Group 1 Automotive
GPI
Sonic Automotive
SAH
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, and the trend is here to stay.
Key Factors Shaping the Industry
Supply-Demand Mismatch Boosts Vehicle Margins: Economic recovery, rise in customer spending and preference for private transportation have fueled the demand for vehicles. Contrarily, semiconductor shortage has put a lid on the supply levels. Amid the chip crunch, the inventory level is rather low, but that’s resulting in higher average transaction prices of vehicles. In the light of the current scenario, auto retailers are recording high vehicle margins, which are boosting their bottom line.
Retailers Putting Pedal to the Metal With e-Commerce: Since the coronavirus pandemic outbreak, digitization has been in high gear and the trend is here to stay. Online traffic is on the rise, with auto retailers ramping up digital capabilities to make deals with customers and arrange for home deliveries of vehicles. Initiatives like ship-to-home next day, curbside pick-up option, and buy online, pick-up in stores options are picking pace, driving additional traffic to companies’ online sites. Enhanced digital solutions are providing shoppers with a truly comprehensive and personal experience.
Acquisition Deals Enriching Top-Line Growth & Portfolio: A wave of consolidation is sweeping across the auto retail industry. Big retailers are scooping up smaller rivals of late to bolster scalability, revenues and competitive advantage. For instance, Sonic completed the buyout of RFJ Auto Partners in December 2021, which is expected to add $3.2 billion to Sonic’s annual revenues. The recent acquisitions of Peacock Automotive Group and Priority 1 have buoyed AutoNation’s portfolio. In 2021, Group 1 completed transactions representing $2.5 billion of acquired revenues. A spree of acquisitions brought Lithia’s total expected annualized revenues acquired to $6.9 billion in 2021.
Robust Cash Flows Supporting Investor-Friendly Moves: Riding on high demand, strong vehicle margins, digitization ramp-up and strategic buyouts, auto retailers are generating record profits. Free cash flow is soaring, and companies are actively boosting shareholder value via dividends and share buybacks. Noted auto retailers including Sonic, AutoNation, Lithia, Group 1 and Penske have resorted to dividend hikes and/or boosted buyback lately, instilling shareholders’ confidence.
Zacks Industry Rank Instills Optimism
The Zacks Auto Retail & Whole Sales industry is a nine-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #9, which places it in the top 4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} of the Zacks-ranked industries outperform the bottom 50{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} by a factor of more than 2 to 1.
The industry’s positioning in the top 50{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are upbeat about this group’s earnings growth potential. Since Sep 30, the industry’s earnings estimates for 2022 have increased 19.4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Tops Sector and S&P 500
The Zacks Auto Retail & Whole Sales industry has outperformed the Zacks S&P 500 composite as well as the Auto, Tires and Truck sector over the past year. The industry has gained 16.4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over this period compared with the S&P 500’s growth of 14.6{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. Meanwhile, the sector has lost 5.1{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over the said time frame.
One-Year Price Performance
Industry’s Current Valuation
Since automotive companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.
On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 6.36X compared with the S&P 500’s 14.32X and the sector’s trailing 12-month EV/EBITDA of 12.81X.
Over the past five years, the industry has traded as high as 10.08X, as low as 4.32X and at a median of 7.29X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
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5 Top Picks
AutoNation: America’s largest automotive retailer, AutoNation is riding high on a strong footprint, large dealer network, aggressive store expansion efforts and the brand extension strategy. The recent acquisitions of Peacock Automotive and Priority 1 Automotive are set to add $380 million and $420 million, respectively, to AutoNation’s annualized revenues. AN’s digital platform — AutoNation Express — and focus on operational discipline are fueling top- and bottom-line growth of the firm.
AutoNation, which currently sports a Zacks Rank #1 (Strong Buy), has a long-term expected EPS growth rate of 23.5{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. The Zacks Consensus Estimate for its 2022 earnings and sales indicates a year-over-year uptick of 2.6{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} and 5.7{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}, respectively. Shares of AN have increased 6.2{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over the past six months.
Price and Consensus: AN
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Lithia: One of the noteworthy names in the auto retail space, Lithia’s diversified product mix and multiple streams of income reduce its risk profile and position it for sales and profit growth. Lithia’s Driveway e-commerce program is helping it to further boost prospects. The firm’s strategic buyouts are fortifying its market share and portfolio. LAD — being committed to maximizing shareholders’ wealth — increased its dividend in each of the last five years, with an annualized growth rate of 5.92{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}.
Lithia, which currently holds a Zacks Rank #2 (Buy), has a long-term expected EPS growth rate of 21.4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. The Zacks Consensus Estimate for its 2022 sales indicates a year-over-year uptick of 14.9{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. Lithia steadily exceeded earnings expectations in the last four quarters. Shares of LAD have moved up 4.2{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over the past six months.
Price and Consensus: LAD
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Penske: Penske engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. The buyout of Kansas City Freightliner, completed during second-quarter 2021, is expected to add $450 million to Penske’s annualized revenues. The McCoy acquisition, completed in November, is expected to bolster the top line of Penske’s PTG subsidiary. In 2021, the company hiked its quarterly dividend four times. In January, it again raised the payout by 2.2{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}.
Penske, which currently carries a Zacks Rank #2, has a long-term expected EPS growth rate of 20.9{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. The Zacks Consensus Estimate for its 2022 sales indicates a year-over-year uptick of 7.5{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. Penske managed to pull off earnings beat in the last four quarters, with the average being 18.7{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. Shares of PAG have gained 8.9{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over the past six months.
Price and Consensus: PAG
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Group 1: Another notable automotive retailer, Group 1 operates primarily in the United States and U.K. In 2021, the company acquired Prime Automotive in the Northeastern United States and the Robinsons Group in the U.K., which diversified Group 1’s footprint. The AcceleRide platform, Group 1’s online retailing initiative, is yielding positive results. The company increased its dividend 11 times in the past five years, with an annualized dividend growth rate of 8.1{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}.
Group 1, which currently has a Zacks Rank #2, has a long-term expected EPS growth rate of 12.10{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. The Zacks Consensus Estimate for its 2022 earnings and sales indicates a year-over-year uptick of 1.8{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} and 23.7{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}, respectively. Group 1 surpassed earnings estimates in the preceding four quarters. Shares of GPI have increased 12.3{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over the past six months.
Price and Consensus: GPI
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Sonic: Sonic is one of the largest used and new vehicle retailers in the United States. Sonic’s EchoPark unit is the major growth engine of the firm. The auto retailer recorded record used-vehicle unit sales of 77,835 for 2021, up 36.2{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} year over year. The RFJ buyout substantially boosted Sonic’s portfolio and geographical footprint and catapulted SAH into the top-five biggest dealership groups in the United States. Thanks to upbeat prospects, Sonic raised its quarterly dividend by 108{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} recently.
The Zacks Consensus Estimate for Sonic’s 2022 earnings and sales indicates a year-over-year uptick of 12.5{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} and 37.4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}, respectively. Over the trailing four quarters, Sonic—which currently carries a Zacks Rank #2— surpassed earnings estimates on all occasions, with an average of 35.5{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. Shares of SAH have inched up 3.4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over the past six months.
Price and Consensus: SAH
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Lithia Motors, Inc. (LAD): Free Stock Analysis Report
Penske Automotive Group, Inc. (PAG): Free Stock Analysis Report
AutoNation, Inc. (AN): Free Stock Analysis Report
Group 1 Automotive, Inc. (GPI): Free Stock Analysis Report
Sonic Automotive, Inc. (SAH): Free Stock Analysis Report
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