The auto dealers and rental industry is growing thanks to factors such as the strong demand for vehicles, robust consumer spending, growth in travel demand, a shift in attitude towards car ownership, the popularity of shared mobility, the impracticality of owning a vehicle, etc.
Amid this backdrop, it could be wise to buy fundamentally strong auto stocks AutoNation, Inc. (AN), Group 1 Automotive, Inc. (GPI), and Cars.com Inc. (CARS), instead of CarMax, Inc.’s (KMX), given its poor fundamentals and growth prospects.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the auto dealers and rental industry and why it could be wise to avoid KMX now.
The demand for automobiles has rebounded strongly this year, with new vehicles showing strong growth over the previous year. U.S. new vehicle sales rose 2% year-over-year to 1.21 million units in October. However, used-vehicle sales in September declined 3.2% sequentially to 3 million units, while retail used-vehicle sales declined 3.6% sequentially to 1.58 million.
Moreover. new vehicle inventory was higher than in early October. As of November 6, 2023, total new vehicle inventory stood at 2.40 million, up 62% from the same time a year ago. Also, fleet sales dropped for the first time in October due to the UAW strike. There was a 10.4% decline in sales to large fleets in October.
The rental industry remains well poised for growth as urbanization leads to congestion, reducing city parking, thereby promoting rental services, with car-sharing and peer-to-peer platforms transforming the industry. Technology is also reshaping the field with innovative solutions, and low car ownership among cost-conscious millennials is boosting the passenger car rental market.
The global passenger car rental market is projected to reach $173.19 billion in 2023, growing at a CAGR of 5.4%. Moreover, the demand for new and used cars is also rising. Retail new vehicle sales are expected to rise 7% year-over-year in 2023, while fleet sales are projected to increase by 40%.
Used car company KMX reported a 13.1% year-over-year decline in total net sales and operating revenue during the second quarter ended on August 31, 2023, to come in at $7.07 billion. Its used vehicle sales declined 11% over the prior-year quarter to $5.59 billion.
The company’s comparable store used vehicle units declined by 9%. Its used-vehicle gross profit per unit (GPU) came in at $2,251, lower than the prior-year quarter’s $2,282. Its gross profit decreased by 5.5% year-over-year to $696.77 million, while its net earnings fell by 5.8% from the year-ago quarter to $118.64 million.
Analysts expect KMX’s revenue for the quarter ending November 30, 2023, to decline 1.6% over the prior-year quarter to $6.40 billion. The stock has underperformed, falling 26.4% over the past three months to close the last trading session at $62.51.
On top of it, KMX’s 7.94% trailing-12-month Return on Common Equity is 29.9% lower than the 11.34% industry average. Its trailing-12-month net income margin of 1.59% is 63% lower than the 4.29% industry average. Furthermore, the stock’s 1.50% trailing-12-month Capex/Sales is 54% lower than the industry average of 3.26%.
So, let’s analyze the fundamental aspects of the three Auto Dealers & Rentals picks, beginning with the third choice.
Stock #3: AutoNation, Inc. (AN)
AN operates as an automotive retailer in the United States. The company operates through Domestic, Import, and Premium Luxury segments. It offers a range of automotive products and services, including new and used vehicles; and parts and services, such as automotive repair and maintenance, and wholesale parts and collision services.
On October 31, 2023, AN announced the official launch of AutoNationParts.com, a new eCommerce website that allows customers to purchase high-quality automotive parts and accessories, offering fast nationwide shipping for genuine manufacturer parts from over 25 brands, meeting the growing demand for online auto parts shopping. The website will enable the company to reach a wider customer base.
In terms of the trailing-12-month Return on Total Capital, AN’s 12.40% is 101.6% higher than the 6.15% industry average. Likewise, its 49.60% trailing-12-month Return on Common Equity is 337.5% higher than the 11.34% industry average. Additionally, its 2.60x trailing-12-month asset turnover ratio is 160.5% higher than the 1x industry average.
AN’s revenue for the fiscal third quarter that ended September 30, 2023, increased 3.4% year-over-year to $6.89 billion. Its adjusted operating income came in at $415.80 million. In addition, the company’s adjusted net income and earnings per share stood at $243.70 million and $5.54, respectively.
Street expects AN’s revenue for the quarter ending March 31, 2024, to increase 3.4% year-over-year to $6.62 billion. It surpassed the Street EPS estimates in each of the trailing four quarters. The stock has gained 22.4% year-to-date to close the last trading session at $131.38.
AN’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #5 out of 20 stocks in the B-rated Auto Dealers & Rentals industry. It has a B grade for Value. To see AN’s Growth, Momentum, Stability, Sentiment, and Quality ratings, click here.
Stock #2: Group 1 Automotive, Inc. (GPI)
GPI operates in the automotive retail industry in the United States and the United Kingdom. The company sells new and used cars, light trucks, and vehicle parts, as well as service and insurance contracts; arranges related vehicle financing; and offers automotive maintenance and repair services.
On June 1, 2023, GPI announced the acquisition of Beck & Masten Kia, expanding its presence in the Houston market to 15 brands and 18 dealerships and adding $85 million in annual revenues.
In terms of the trailing-12-month Return on Common Equity, GPI’s 26.24% is 131.5% higher than the 11.34% industry average. Likewise, its 8.73% trailing-12-month Return on Total Assets is 124.3% higher than the 3.89% industry average. Additionally, its 2.55x trailing-12-month asset turnover ratio is 155.3% higher than the 1x industry average.
GPI’s total revenues for the fiscal third quarter that ended September 30, 2023, increased 13% year-over-year to $4.71 billion. Its gross profit increased 4.5% year-over-year to $786.20 million. Also, its net income stood at $163.90 million, while its earnings per share came in at $11.65.
Analysts expect GPI’s revenue for the quarter ending December 31, 2023, to increase 8.4% year-over-year to $4.41 billion. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 52.2% to close the last trading session at $263.70.
It’s no surprise that GPI has an overall rating of B, which translates to a Buy in our proprietary POWR Ratings system.
It has an A grade for Value. Within the same industry, it is ranked #4. To see GPI’s Growth, Momentum, Stability, Sentiment, and Quality ratings, click here.
Stock #1: Cars.com Inc. (CARS)
CARS operates as a digital marketplace and provides solutions for the automotive industry. Its platform connects car shoppers with sellers. The company offers services that connect sellers with buyers, provide financing tools, and empower shoppers with digital resources for car buying decisions.
On November 2, 2023, CARS acquired D2C Media Inc., a major Canadian automotive tech provider. The acquisition widens their reach, boosts growth, and solidifies their presence in Canada's auto tech sector, enabling them to serve more dealers and work closely with OEMs.
Alex Vetter, the CEO at CARS, expressed excitement about acquiring D2C Media, emphasizing the opportunity to expand further across North America and create value for Canadian retailers by simplifying the car buying and selling process.
On October 17, 2023, CARS introduced its new brand, "Cars Commerce," bringing together different commercial names. They aim to make car buying and selling easier with a platform covering everything from before the sale to after it. This includes a marketplace, digital experience, trade & appraisal, and a media network to enhance industry connections and transparency.
Alex Vetter, CEO at CARS, said, "Cars Commerce brings consumers, OEMs, retailers, and lenders together to speed up operations, deliver more sales at greater profitability, and reduce a dealer's turn time by up to 20%. We have built a platform with a differentiated and powerful combination of audience, reviews and content, technology and data – and there's a word for it: Commerce.”
In terms of the trailing-12-month net income margin, CARS’ 17.76% is 512.7% higher than the 2.90% industry average. Likewise, its 18.43% trailing-12-month levered FCF margin is 130.7% higher than the industry average of 7.99%. Furthermore, the stock’s 28.01% trailing-12-month Return on Common Equity is 753% higher than the industry average of 3.28%.
For the fiscal third quarter ended September 30, 2023, CARS’ total revenue increased 5.9% year-over-year to $174.33 million. Its operating income came in at $14.32 million. The company’s net income and earnings per share stood at $4.49 million and $0.07, compared to a net loss and loss per share of $2.94 million and $0.04 in the year-ago quarter.
In addition, its adjusted EBITDA came in at $49.49 million.
For the quarter ending December 31, 2023, CARS’ EPS and revenue are expected to increase 56.5% and 5.9% year-over-year to $0.52 and $178.11 million, respectively. The stock has gained 35% year-to-date to close the last trading session at $18.59.
CARS’ strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
Within the Auto Dealers & Rentals industry, it is ranked #3. It has a B grade for Value. Click here to see CARS’ Growth, Momentum, Stability, Sentiment, and Quality ratings.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
AN shares were trading at $131.40 per share on Friday morning, up $0.02 (+0.02%). Year-to-date, AN has gained 22.46%, versus a 15.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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