Lithia Motors, AutoNation, Group 1 Automotive and Sonic AutomotiveOctober 29, 2021
Table of Contents
For Immediate Release
Chicago, IL – October 27, 2021 – Today, Zacks Equity Research discusses Auto – Retail and Wholesale, including Lithia Motors, Inc. LAD, AutoNation, Inc. AN, Group 1 Automotive, Inc. GPI and Sonic Automotive, Inc. SAH.
The Zacks Auto Retail and Whole Sales industry is in the fast lane amid strong vehicle demand, courtesy of a rise in consumer spending and preference for personal mobility. The soaring popularity of electric vehicles is spiking sales volumes. Meanwhile, the shift toward digital shopping has been growing at warp speed, thereby boosting sales.
As a new era of dealership consolidation is underway, many auto retail biggies are looking to acquire smaller dealer groups for scale expansion and commercial synergies. Amid the tailwinds, prospects of industry participants like Lithia Motors, AutoNation, Group 1 Automotive and Sonic Automotive appear bright.
The automotive sector’s performance depends on its 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 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, and the trend is here to stay.
3 Key Trends
Robust Demand: Buyers’ appetite for personal vehicles is quite strong and is likely to remain so amid economic recovery, and preference for private transportation over public/shared conveyance means. Consumer spending is on the rise, with Americans being way more confident to make discretionary purchases.
As such, higher sales of vehicles are boosting the industry’s prospects. Also, with zero-emission vehicles getting popular by the day and the electric vehicle charging infrastructure on a roll, consumers are now able to overcome range anxiety and are actively looking to purchase eco-friendly cars, which augur well for the industry’s growth.
E-commerce Ramp-up: The process of buying cars has undergone a digital transformation, with online sales getting ever so popular, thanks to the pandemic. Auto dealers are ramping up their digital capabilities to make deals with customers and arrange for home deliveries of vehicles.
The launch of a simple, secure and user-friendly online platform is aiding in seamless end-to-end digitization of the companies’ sales processes. The race to invest vast sums in the e-commerce domain is gathering steam, propelling businesses to reach new heights.
Flurry of M&A Activities: A wave of consolidation is sweeping across the auto retail industry. Dealership transactions were up 27% year over year to 144 in first-half 2021, per Kerrigan. The dealership consulting firm expects a surge in deal making across the industry in the second half.
Big retailers that are flush with cash are seeking to scoop up smaller rivals in a hope that an increase in scale would help them lead digital transformation and boost competitive advantage. Recent buyout deals like Group 1-Prime Automotive, Sonic-RFJ Auto, and Asbury-Larry Miller, among others, have generated a lot of buzz.
Zacks Industry Rank Instills Optimism
The Zacks Auto Retail & Wholesale industry is a nine-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #11, which places it in the top 4% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright 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 upbeat about this group’s earnings growth potential. Since June 30, the industry’s earnings estimates for 2021 have increased 48.3%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outshines S&P 500 & Sector
The Zacks Auto Retail & Wholesale industry has rallied 78.5% over the past year, comfortably surpassing the Zacks S&P 500 composite and the sector’s growth of 35.3% and 31.6%, respectively.
Industry’s Current Valuation
Since automotive companies are debt laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.
On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 7.33X compared with the S&P 500’s 16.24X and the sector’s 11.93X.
Over the past five years, the industry has traded as high as 9.99X, as low as 4.28X and at a median of 7.46X.
4 Prominent Picks
AutoNation: One of the leading auto retailers in the United States, AutoNation presently sports a Zacks Rank #1 (Strong Buy). A strong footprint, large dealer network, store expansion efforts, brand extension strategy and alliances bode well for AutoNation. The buyouts of Priority 1 Automotive and Peacock Automotive Group are set to add $420 million and $380 million, respectively, to AutoNation’s annualized revenues.
With the launch of its digital platform AutoNation Express, the company has stepped up its digitization game. Cost-cut initiatives, a strong balance sheet and investor-friendly moves also boost shareholders’ confidence. The Zacks Consensus Estimate for 2021 earnings and sales indicates a year-over-year uptick of 124.3% and 27.2%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Lithia: Lithia, which presently carries a Zacks Rank #2 (Buy), is one of the key names in the auto retail space. A spree of acquisitions brought Lithia’s total annualized revenues acquired to $6.2 billion so far this year, keeping it well ahead of the schedule laid out in the five-year plan rolled out in July 2020.
Enhanced digital solutions — including the Driveway e-commerce program — are helping Lithia to further boost profitability and market presence. Its robust cash flow and solid dividend history are praiseworthy. The firm’s ambitious plan to generate $50 billion in revenues and $50 in earnings per share by 2025 instills optimism. The Zacks Consensus Estimate for 2021 earnings and sales indicates a year-over-year uptick of 100.6% and 71.1%, respectively.
Group 1: Another notable automotive retailer, Group 1 operates primarily in the United States, U.K. and Brazil. The impending acquisition of Prime Automotive Group will diversify its U.S. foothold and increase this Zacks Rank #2 company’s global dealership count to 220. Year to date, Group 1 has completed $6550 million of acquired revenues and the proposed transaction is expected to take its total acquired revenues to more than $2.5 billion.
The AcceleRide platform, Group 1’s online retailing initiative, is yielding positive results. Continued focus on operational discipline and commitment to increase shareholder value are other positives. The Zacks Consensus Estimate for 2021 earnings and sales indicates a year-over-year uptick of 83% and 25.3%, respectively.
Sonic: Used and new vehicle retailer, Sonic presently carries a Zacks Rank #2. Sonic’s EchoPark unit is a major growth engine. The auto retailer aims to retail between 100,000 and 105,000 units in 2021, and expects the EchoPark unit to account for 20-25% of total 2021 revenues, indicating an increase from 15% in 2020.
Importantly, Sonic targets 575,000 units in sales and $14 billion in annual EchoPark revenues by 2025, with a nationwide distribution network of more than 140 stores. The impending buyout of RFJ Auto Partners is expected to add $3.2 billion to Sonic’s annual revenues and catapult the firm into the top five biggest dealership groups in the United States. The Zacks Consensus Estimate for 2021 earnings and sales indicates a year-over-year uptick of 96% and 28%, respectively.
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AutoNation, Inc. (AN) : Free Stock Analysis Report
Group 1 Automotive, Inc. (GPI) : Free Stock Analysis Report
Sonic Automotive, Inc. (SAH) : Free Stock Analysis Report
Lithia Motors, Inc. (LAD) : Free Stock Analysis Report
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