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The Zacks Auto Retail and Wholesale industry is set for growth, driven by vehicle demand, which may receive an additional boost with the increased likelihood of a Federal Reserve rate cut next month. While sales have managed to hold ground, dealerships are offering attractive incentives amid high inventory levels, which are putting pressure on retailers’ profit margins. Despite this, auto retailers like Penske Automotive PAG and Rush Enterprises RUSHA stand out for their strategic expansions and shareholder-focused strategies.
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.
Factors at Play
Continued Growth in Vehicle Demand: Despite elevated interest rates, U.S. vehicle sales have remained steady. In the first half of 2024, sales increased by approximately 1% compared to the same period last year. The July 2024 SAAR reached 15.8 million units, reflecting a 4.2% rise from June and remained roughly consistent with July 2023. Cox Automotive forecasts full-year retail auto sales in the United States to climb to 12.8 million in 2024. As inflation eases and unemployment remains high, the likelihood of a Federal Reserve rate cut in September is growing. Should the cost of vehicle financing decrease, vehicle demand is expected to rise, benefiting industry players.
Shrinking Vehicle Margins: Per GlobalData estimates, inventory levels rose to around 2.8 million vehicles at the end of the second quarter of 2024. Amid the rising inventory, automakers and dealers are ramping up incentives and sweetening deals. The average incentive per vehicle surged 50% year over year in June. 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 Moves: Numerous industry players remain dedicated to enhancing shareholder value through buybacks and dividends. These auto retailers are capitalizing on acquisitions, expanding their store networks, and implementing cost-saving measures, which generate substantial cash flow. This, in turn, allows them to reward investors with significant share repurchases and increased dividends.
Zacks Industry Rank Holds Promise
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 #100, which places it in the top 40% 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 encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% 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 optimistic about this group’s earnings growth potential.
Before we present a few stocks that you may 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 inched up 1.2% over this period against the sector’s decline of 11%. Meanwhile, the S&P 500 has risen 23.5%.
One-Year Price Performance
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 7.43X compared with the S&P 500’s 18.23X and the sector’s trailing 12-month EV/EBITDA of 15.22X.
Over the past five years, the industry has traded as high as 10.71X, as low as 4.35X and at a median of 6.83X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
2 Stocks Worth Buying
Penske: It engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. Penske is riding on its strategic acquisitions. Last year, the company completed acquisitions worth more than $340 million in annualized revenues.So far in 2024, Penske has completed acquisitions representing nearly $2 billion in estimated annual revenues.
Penske’s Premier Truck Dealership business spans 48 locations across North America, contributing to diversification. These dealerships have seamlessly integrated, expanding the company’s Canadian presence. PAG’s strong balance sheet and investor-friendly moves instill optimism. Low leverage and lack of debt maturities anytime soon give the company enough flexibility to tap into any growth opportunities. In the last five years, the company hiked its payout 17 times, with an annualized growth rate of 19.24%.
Penske currently carries a Zacks Rank #2 (Buy) and has a Value Score of A. The Zacks Consensus Estimate for 2024 sales implies year-over-year growth of 3.4%. The consensus mark for 2024 and 2025 earnings has moved up by 6 cents and 2 cents, respectively, over the past seven days.
Price & Consensus: PAG
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.
The company reported better-than-expected earnings for the second quarter of 2024. Thanks to its broad customer base and ongoing commitment to strategic goals, Rush kept in pace with the market in parts sales while exceeding industry performance in service sales. 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 28.5%.
Rush Enterprises carries a Zacks Rank #2 and has a Value Score of A. The consensus mark for 2024 EPS has moved north by 60 cents in the past 30 days. The consensus mark for 2025 EPS has moved north by 4 cents in the past 30 days. RUSHA surpassed estimates in the trailing four quarters, the average being 15.2%.
Price & Consensus: RUSHA
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Penske Automotive Group, Inc. (PAG) : Free Stock Analysis Report
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