Zacks Industry Outlook Highlights Penske Automotive, Group 1 Automotive and Rush Enterprises
For Immediate Release
Chicago, IL – September 19, 2023 – Today, Zacks Equity Research discusses Penske Automotive PAG, Group 1 Automotive GPI and Rush Enterprises RUSHA.
Industry: Auto Retail
Link: https://www.zacks.com/commentary/2151738/3-stocks-to-buy-on-your-road-to-profit-in-the-auto-retail-industry
The Zacks Auto Retail and Wholesale industry is poised for substantial growth, primarily due to the strong demand for new vehicles. The industry's growth is further propelled by ongoing merger and acquisition activity, which is driving expansion and scalability. Additionally, digitization has a pivotal role in enhancing customer engagement.
Achieving sustained success in the evolving landscape of auto retail will require a delicate balance between digital innovation, effective cost management, and an unwavering commitment to enhancing customer experience. For those seeking to capitalize on the prospects within the retail auto industry, it may be prudent to consider investing in Penske Automotive, Group 1 Automotive and Rush Enterprises.
Industry Overview
The automotive sector's performance depends on the retail and wholesale network. Through dealership and retail chains, companies in the Zacks Auto Retail and Wholesale 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 and arrangement of vehicle financing. The industry 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 focusing more on e-commerce retailing.
Key Investing Themes
Demand For Vehicles Hold Ground: At the beginning of 2023, industry experts had expected a potential slowdown in the U.S. auto market due to the increased cost of vehicle financing. However, consumer demand proved to be more resilient than initially predicted. During the first six months, sales of new vehicles totaled 7.69 million units, reflecting a 12.3% increase compared to the same period in 2022.
This strong demand for automobiles suggests that the impact of rising interest rates on consumer purchasing decisions has been relatively limited. To quote Jonathan Smoke, the chief economist at Cox Automotive, "Consumers have figured out how to continue buying new cars." The outlook for U.S. vehicle sales in 2023 remains positive. Cox Automotive predicts that full-year vehicle sales will reach approximately 15 million units, up from 13.9 million units in 2022.Auto retailers are poised to benefit from a surge in new vehicle sales as demand for personal mobility and new models continues to grow.
M&A Deals Fueling Industry Growth: The industry is experiencing significant growth thanks to the strategic utilization of mergers and acquisitions (M&A). A surge in consolidation began in 2021, continued in 2022 and into 2023, with dealership M&A activities playing a pivotal role. Just 10 days back, Asbury announced that it is set to acquire Jim Koons Automotive for around $1.2 billion, marking the largest auto retail acquisition since 2021.
Dealerships are actively engaged in expanding their operations and leveraging economies of scale. Both large and smaller dealer groups are aggressively pursuing growth by adding more stores, which not only enable them to offer a broader range of vehicles at different price points but also allow them to reach customers across wider geographical areas. These strategic expansion efforts improve scalability, and boost revenue generation and the competitive advantage of auto retailers.
Digital Transformation Buoying Prospects: The auto retail industry has fully embraced the digital age, harnessing online platforms and services to elevate customer engagement and convenience to new heights. Innovations such as home delivery and curbside pick-up have spurred a notable surge in online traffic. These advanced digital solutions provide customers with a personalized and all-encompassing shopping experience.
As the momentum of digitization continues to gain momentum, automotive retail enterprises find themselves in a prime position to attain unprecedented levels of success. Achieving this requires a delicate balance between digital innovation, cost management, operational optimization and an unwavering focus on enhancing the customer experience — an imperative for all industry stakeholders.
Shareholder-Friendly Moves: Thanks to solid cash-generating potential amid high demand for vehicles and e-commerce efforts, auto retailers are delivering robust results. With free cash flow soaring, firms are actively boosting shareholder value via dividends and share buybacks. Noted auto retailers, including Rush Enterprises, Group 1 and Penske, are resorting to dividend hikes and/or buyback, instilling shareholders' confidence.
Zacks Industry Rank Indicates Rosy Outlook
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 #30, which places it in the top 12% 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 promising 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 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 confident in this group's earnings growth potential. Over the past three months, the industry's earnings estimates for 2023 have increased around 6.5%.
Before we present a few stocks that you may place your bets on, 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 & Wholesale 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 34.5% over this period compared with the S&P 500's growth of 14.5%. Meanwhile, the sector has declined 7.5% over the same timeframe.
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 6.91X compared with the S&P 500's 13.29X and the sector's trailing 12-month EV/EBITDA of 13.54X.
Over the past five years, the industry has traded as high as 10.71X, as low as 4.35X and at a median of 6.86X.
3 Solid Picks
Penske: Based in Michigan, Penske engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. Penske is riding high on strategic acquisitions. It has become the largest dealership group for Freightliner in North America with the Warner Truck Centers buyout. The buyouts of Kansas City Freightliner, McCoy, Team Trucks Centers and Transolutions Truck Centres are boosting Penske's top line.
Balance sheet strength with low leverage and high liquidity bodes well. Investor-friendly moves also instill confidence. In the first half of 2023, Penske returned $437 million to shareholders via dividends and buybacks. It has hiked its payout thrice this year. Stakes in Penske Transportation Solutions provides the company equity income, cash dividends and cash tax savings.
Penske carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The Zacks Consensus Estimate for PAG's 2023 and 2024 EPS has moved north by 85 cents and 61 cents, respectively, in the past 60 days. The company surpassed earnings estimates in the last four quarters, the average being 6.2%.
Group 1: Based in Texas, Group 1 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 has acquired revenues of around $1 billion so far this year. GPI'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 February, GPI hiked its 2023 annual dividend rate by 20%. Last month, the company boosted its buyback authorization to $250 million.
Group 1 carries a Zacks Rank #2 and has a VGM Score of B. The Zacks Consensus Estimate for GPI's 2023 sales implies growth of 8%. The consensus mark for 2023 and 2024 EPS has moved north by $2.92 and $2.69, respectively, in the past 60 days. The company surpassed earnings estimates in the last four quarters, the average being 7.9%.
Rush Enterprises: Based in Texas, RUSHA 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.
Strong FCF generation, disciplined expense management approach and investor-friendly moves are praiseworthy. Rush has increased its payout seven times in the last five years, with an average annualized growth rate of 30.7%. The company aims to generate $10 billion in annual revenues by 2027.
Rush carries a Zacks Rank #2 and has a VGM Score of B. The consensus mark for 2023 and 2024 EPS has moved north by 24 cents and 3 cents, respectively, in the past 60 days. The long-term earnings growth rate for the company is pegged at 15%, higher than the industry's 9.9%.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Penske Automotive Group, Inc. (PAG) : Free Stock Analysis Report
Group 1 Automotive, Inc. (GPI) : Free Stock Analysis Report
Rush Enterprises, Inc. (RUSHA) : Free Stock Analysis Report
