Zacks Industry Outlook Highlights Penske Automotive, Lithia Motors and Group 1 Automotive
For Immediate Release
Chicago, IL – March 4, 2024 – Today, Zacks Equity Research discusses Penske Automotive PAG, Lithia Motors LAD and Group 1 Automotive GPI.
Industry: Auto - Retail & Wholesale
Link: https://www.zacks.com/commentary/2234379/3-auto-retailers-to-watch-despite-dim-industry-prospects
The outlook for the Zacks Auto Retail and Wholesale industry appears subdued due to worries over decelerating vehicle sales growth as much of the pent-up demand has been absorbed in 2023. High auto loan rates are likely to prompt prospective buyers to postpone purchases. While attractive incentives offer some relief to consumers, they might impact retailers' profit margins.
Moreover, slower-than-anticipated adoption of electric vehicles is projected to constrain sales. Amid these intricate industry dynamics, auto retailers such as Penske Automotive, Lithia Motors and Group 1 Automotive appear better positioned to address challenges, thanks to their strategic expansion initiatives and shareholder-friendly moves.
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. Digitization is here to stay.
Key Themes Shaping the Industry
Vehicle Sales Growth to Slow Down: Following a robust sales rebound in 2023, it seems that the auto industry is poised for a moderate pace of growth this year. With pent-up demand largely absorbed in 2023, the sales growth rate is expected to decelerate this year. Edmunds anticipates U.S. auto sales of 15.7 million vehicles in 2024. This indicates a nominal year-over-year uptick of 1.3%, compared with 13% year-over-year growth in 2023. Cox Automotive adopts a more cautious outlook, projecting a more modest increase in industry sales to 15.6 million units.
Cost of Vehicle Financing is Still High: While the Fed projected three rate cuts for 2024, fostering optimism for potential economic stimulation, the cost of vehicle financing remains reasonably high. The average monthly loan payment on new cars in the fourth quarter of 2023 was $739, up from $717 in the same period a year ago. Affordability concerns might linger amid high borrowing costs.
Slower-Than-Expected EV Sales: Expectations of rapid growth in EV sales driving industry gains are facing challenges. High prices of many new EV models and consumer reluctance to switch to battery power due to concerns about refueling infrastructure have slowed down adoption. Automakers, including General Motors and Ford, have adjusted production targets and delayed some electric models in response to these market dynamics.
Vehicle Margins at the Risk of Contracting: Per J.D. Power and GlobalData estimates, inventory levels were at about 1.6 million vehicles at the end of last month, a 3.3% increase from December and a 38% jump from January 2023. Amid the rising inventory, automakers and dealers are ramping up incentives and sweetening deals. The average incentive per vehicle surged 74% from January 2023 to $2,346 last month. This surge in incentives reflects a shift toward a buyer's market, placing increased pressure on retailers. While consumers may benefit from lower vehicle prices, dealers might grapple with squeezed profit margins.
Zacks Industry Rank Indicates Glum Prospects
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 #233, which places it in the bottom 7% 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 dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for 2024 have contracted around 3.4%.
Before we present a few stocks that you may still add to your watchlist, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector and S&P 500
The Zacks Auto Retail & Whole Sales industry has underperformed the Zacks S&P 500 composite as well as the Auto, Tires and Truck sector over the past year. The industry has gained 4.8% over this period compared with the sector and the S&P 500’s growth of 8.3% and 26.5%, respectively.
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 7.04X compared with the S&P 500’s 14.09X and the sector’s trailing 12-month EV/EBITDA of 14.03X.
Over the past five years, the industry has traded as high as 10.71X, as low as 4.39X and at a median of 6.92X.
3 Stocks Worth a Look
Penske: It engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. It has become the largest dealership group for Freightliner in North America with the Warner Truck Centers acquisition. The buyouts of Kansas City Freightliner, McCoy and Team Trucks Centers are boosting Penske’s top line. Last year, the company completed acquisitions worth more than $340 million in annualized revenues.
The acquisition of Rybrook Group, completed in January 2024, will add $1 billion to Penske's annualized revenues. In 2023, the company hiked its payout four times, with the dividend increasing from 57 cents to 79 cents per share. In January 2024, the company again increased its dividend by 10% to 87 cents. PAG’s low leverage and lack of debt maturities anytime soon give the company enough flexibility to tap into any growth opportunities.
Penske currently carries a Zacks Rank #3 (Hold) and has a Value Score of A. It pulled off an earnings beat in two of the last four quarters for as many misses, with the average being 1.5%. The consensus mark for 2025 sales and EPS implies year-over-year growth of 0.5% and 2%, respectively.
Lithia: Its diversified product mix and multiple streams of income reduce its risk profile and position it for long-term top- and bottom-line growth. Enhanced digital solutions — including the Driveway e-commerce program — are helping LAD to boost profitability and market presence further. Strategic buyouts are helping the auto retailer increase its market share and solidify its portfolio. Lithia acquired roughly $3.8 billion in annualized revenues last year.
Earlier this year, Lithia acquired U.K. car dealership group Pendragon, which is expected to add around $4.5 billion to its annualized revenues. A couple of days back, LAD purchased Carousel Motor, which will add $900 million to annual sales. Robust cash flows and investor-friendly moves via dividends and share buybacks are driving shareholders’ confidence. Its 2025 targets to achieve $55-$60 annual EPS sparks optimism.
Lithia carries a Zacks Rank #3 and has a Value Score of A. The Zacks Consensus Estimate for LAD’s 2024 and 2025 sales implies growth of 12.8% and 11.7%, respectively. Over the past seven days, the consensus mark for 2024 EPS has been revised upward by 10 cents to $37.19, indicating a year-over-year uptick of 1%.
Group 1: It is one of the leading automotive retailers in the world, with operations primarily located in the United States and the UK. Group 1’s acquisitions of dealerships and franchises to expand and optimize its portfolio are fueling growth. The company acquired revenues of more than $1 billion last year.
In February 2024, Group 1 bought RRR Automotive, which is expected to add $500 million to GPI's annual revenues. The company’s diversified product mix and omnichannel efforts bode well. The AcceleRide platform, its online retailing initiative, active at most of the firm’s U.S. dealerships, allows the company to enjoy higher productivity. Group 1’s investor-friendly moves instill optimism.In the last five years, the company has increased its dividend 13 times, with annualized dividend growth of around 13%.
Group 1 carries a Zacks Rank #3 and has a Value Score of A. The Zacks Consensus Estimate for GPI’s 2025 sales and earnings implies growth of 2% and 3.3%, respectively. It pulled off an earnings beat in three of the last four quarters, with the average being 4.13%.
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
Group 1 Automotive, Inc. (GPI) : Free Stock Analysis Report
Lithia Motors, Inc. (LAD) : Free Stock Analysis Report
