Inflation has hit the automotive sector particularly hard in 2022. But a new report by JPM predicts that the price of used cars could decline by as much as 10% in 2023.
If so, auto dealerships could see renewed interest and offer shareholders attractive returns. Let’s have a look at some of the best car dealership stocks that could benefit from this trend.
Best Car Dealership Stocks To Watch
AutoNation Inc (NYSE: AN)
Let’s start at the top with the second-largest automotive retailer in the United States by market cap.
AutoNation’s car sales of both pre-owned and new vehicles helped the company earn over $20 billion last year.
The used vehicles dealership hosts over 300 locations across the US, along with a comprehensive inventory of cars, trucks, and SUVs.
The company stood out in 2008 by reviving its business and helping build consumer confidence and sales with a payment protection program.
Their protection program offered customers the option to buy back their car at market value if the owner lost their job.
Thanks to this strategic move, the company was able to come out on top during the recession while many competitors were going down.
Helping them gain momentum and strength for more than a decade.
As we’ve seen, the used cars market has been shaken lately due to rising interest rates, which could bring dealers back to their knees.
If AutoNation employs a similar strategy this time around, it could be poised to succeed during the next economic upheaval.
During the last quarter of 2022, the company posted a remarkable EPS beat of 9% with increased revenue of 1.74% YoY.
Shares of the company rallied from their 2020 bottom by more than 500% before starting a consolidation period in 2021.
It appears the market still hasn’t made up its mind, as AN is still shaping up for the next move.
But the chart is posting a bull flag which could eventually break to the upside.
Of course, this would highly depend on the macroeconomic environment and whether or not interest rates will be able to cool down.
Whether AN will keep delivering investors jaw-dropping returns is yet to be seen. But with this price consolidation and a price-to-earnings ratio of 6 multiples, that is the perfect place to keep an eye out for it.
We’ll add this one to our watchlist.
Asbury Automotive Group, Inc. (NYSE: ABG)
Founded in 1995, Asbury is third on the list of largest auto dealerships in the United States. Ausbury does things a little differently, as their dealerships aren’t branded the same.
For example, the company operates Larry H. Miller stores, and more than 36 collision centers through a new acquisition.
ABG spent over $3.2 billion acquiring Miller as part of its ambitious revenue goals.
This is a move that could require the need of more acquisitions and expansions, making Ausbury a compelling bet on the market.
Overall, their current portfolio includes the operation of 148 dealerships and nearly 200 franchises across the country.
Ausbyur’s dealers have built a reputation for high-end vehicles, as close to 80% of its new-vehicle revenue comes from luxury and import brands.
The company also has a customer-friendly car-buying web portal that allows for quick pricing and used vehicle purchases.
A move that has helped the company thrive in the online space.
ABG’S price action appears to be similar to that of AN, except ABG seems to have already broken upwards and out of the bull flag.
The push could be largely due to the company’s low 4x P/E ratio and expansion plans.
However, shares quickly lost momentum and are now retracing into the previous consolidation area.
Whether the shares will find support in the consolidation and move further up or fool bulls into a fake breakout is yet to be seen.
But either way, it appears an opportunity for either bulls or bears might be near.
CarGurus Inc (NASDAQ: CARG)
CarGurus is a dominant player in the online car dealership space. The Massachusetts-based website assists users in comparing local listings and contacting sellers for used and new cars.
The company aims to bring transparency and ease to buying and selling cars.
CarGurus has a significant competitive advantage when compared to brick-and-mortar car dealerships.
Living in the online space allows the company to expand quicker and at fewer costs than car and truck dealerships.
Another advantage of CarGurus over its peers is its business model. It might come as a surprise to learn that the company’s primary revenue source is not vehicle transactions but ads.
Therefore, the website is less likely to be affected by fluctuations in the sales of vehicles. In fact, they could see improved revenue during challenging times as ad spending increases.
But despite its competitive advantage, it appears the markets haven’t caught up with the stock yet.
Unlike its brick-and-mortar counterparts, this tech stock has not been performing as well. The price has been trending down in a channel.
The good news is that CARG shares appear to be now resting near the bottom of the downward channel.
If the channel holds, investors could look at as much as 140% upside from bottom to top. Still offering the possibility of great investment opportunities despite the downward momentum.
But despite the lack of current price performance, CarGuru could be onto something with its disruptive platform.
The online automotive platform surprised analysts during the fourth quarter of last year by beating EPS by more than 100%. However, revenue did decrease by 15% from the same period last year.
Nonetheless, the company brought in more than $1.6 billion in 2022, which represented an increase of 74% from the previous year.
CarGurus’ innovative approach to online car buying has helped it become one of the fastest-growing companies in the automotive industry.
This company could be an attractive stock to add to your portfolio if it can maintain consistent growth.
Are Car Dealership Stocks a Good Investment?
Car and truck dealership stocks can be a good investment as inflationary pressures ease down along with rising interest rates.
Car dealerships had a tough time in 2022 as vehicle sales in the auto industry had their worst year in more than a decade.
Only a mere 13.7 million vehicles were sold in 2022, representing a drop of 8% from the previous year.
Supply chain issues, rising inflation, and a hike in interest rates set up the industry for a perfect storm that drove car sales to a decline.
However, many car dealerships maintained the stock price high despite the decline.
This could partly be due to the perceived long-term value and lowered valuations many dealership stocks had last year.
Used cars are perceived by many as a way to weather inflation. It’s also expected that new car prices could keep rising due to ongoing supply chain difficulties and inflationary pressures.
Therefore, investors could anticipate a higher demand and higher valuations for used vehicles that could help used car dealership stocks benefit from the trend.
Overall, analysts project that the sector could expand at a 6% CAGR through 2030. Showing significant signs of optimism and the potential for future growth ahead.
A recent report by JPM also highlights the possibility that used cars could see a price decline of as much as 10% this year. A move that could bring more buyers back to the table and reverse the decline of 2022.
Whatever the case, the future could be bright for the car dealership industry.
Now that you know more about car dealership stocks, you might want to add one (or more) to your portfolio.
What Is The Biggest Market in Car Dealerships?
The biggest market for car dealerships is China, as it has the largest demand and supply globally. China reported more than 23 million vehicles registered in 2022, almost double that of the United States. In comparison, the US reported 13.7 million during the same period.
What Is The Most Successful Car Dealership?
The most successful car dealership by sales of retail vehicles is CarMax. In the 2022 fiscal year, the company sold more than 900,000 used vehicles. A hike of more than 20% from the prior year. AutoNation is also one of the largest in the country by sales.