Increased sales could make this industry your best stock market game for 2022

It’s been a year for many industries, and not just because of rebounds in sales after the temporary shutdown of so many companies during the early stages of the coronavirus pandemic.

Unprecedented stimulus payments by the federal government to consumers have helped fuel pent-up demand, and with component supply disruptions, the most obvious distortion has been seen on car dealership lots.

That’s why David Dineen, chief investment officer for global small caps at Spouting Rock Asset Management, believes three major auto dealer chains are well positioned for stock price gains in 2022 and beyond.

“We are coming out of the sales trough for this economic cycle” for new cars, he said in an interview.

Spouting Rock Asset Management is based in Bryn Mawr, Pa., And manages $ 3.1 billion in assets.

The supply shortage caused sales of new cars and light trucks to drop to a seasonally adjusted annualized rate (SAAR) of 14.4 million units in October from a SAAR of 18.8 million in April, according to the Bureau. of Economic Analysis.

Federal Reserve Bank of Saint-Louis


Dineen described the October SAAR as “a level of recession,” highlighting an opportunity for investors as auto dealers trade at lower valuations than automakers and parts suppliers.

Bad “comps” for many industries in 2022

When covering financial results, Wall Street analysts and the financial media obsess over year-over-year comparisons due to seasonality. But these “comps” can paint a confusing picture. For example, an industry whose sales slumped in the first days of the coronavirus pandemic in the first quarter of 2020 could have shown stellar “improvement” a year later, even if its sales were not close to recovering levels. before the pandemic.

Artificially high year-over-year increases in sales, profits or cash flow this year could be followed by much slower growth rates as companies in various industries move closer to pre-pandemic standards.

According to Dineen, “you will have difficult compositions for much of the consumption in 2022.”

And that’s why he thinks the big dealerships that sell new cars are a good place for investors who want to do another pandemic rebound game.

Low valuations for car dealerships

Auto dealers as a group have undergone a “reassessment” by investors as the shortage of new cars caused sales to plummet, while creating upward pressure on prices and a shortage of used cars.

To illustrate how this affected stock valuations relative to earnings, we looked at the six auto dealers included in the S&P 1500 SP1500 Composite Index,
+ 2.08%
(consisting of the S&P 500 SPX,
+ 2.10%,
the S&P 400 Mid Cap MID index,
+ 2.09%
and the S&P Small Cap SML index,
+ 2.01%
). Here’s how the forward price-to-earnings ratios of the six car dealerships have evolved since the end of 2019:

FactSet


Forward P / E ratios are based on rolling 12-month earnings estimates among analysts polled by FactSet. Click on the tickers to learn more about each company. Click here for Tomi Kilgore’s in-depth guide to the wealth of free information on the MarketWatch Quote page.

The exception to the downward P / E movement for these dealers was CarMax Inc. KMX,
+ 4.19%.

“CarMax had the most influence in the used car market, which was on fire,” said Dineen. The other five dealers in the table sell both new and used vehicles. Over the next two years, as the supply chain likely recovers and new car production rebounds, he favors AutoNation Inc. AN,
+ 0.12%,
Asbury Automotive Inc. ABG,
-1.41%,
and Sonic Automotive Inc. SAH,
+ 0.82%
for an increase in P / E ratios and stock prices.

For CarMax, comparisons could become “slippery” over the next two years, if a return to new car sales levels in 2019 or 2020 causes the used car market to cool, Dineen said.

Here’s a simpler way to compare the current forward P / E ratios of the six Composite 1500 dealers to their pre-pandemic levels. The list is sorted by market capitalization:

Society Teleprinter Market capitalization. ($ millions) Forward P / E – December 3, 2021 Forward P / E – December 31, 2019 Medium term P / E since December 31, 2019

CarMax inc.

KMX,
+ 4.19%

$ 23,425

19.5

15.9

20.1

Lithia Motors inc.

BOY,
+1.78%

$ 8,899

7.8

11.4

13.1

AutoNation Inc.

A,
+ 0.12%

$ 8,164

6.9

10.3

9.6

Asbury Automobile Group Inc.

ABG,
-1.41%

$ 4,031

5.8

10.6

9.6

Group 1 Automobile Inc.

GPI,
+ 0.68%

$ 3,730

5.9

8.9

7.1

Sonic Automotive Inc. Class A

SAH,
+ 0.82%

$ 1,465

5.4

10.5

9.7

Source: FactSet

Unlike the three dealerships he favors (AutoNation, Asbury and Sonic), Dineen pointed out that Ford Motor Co. F,
+ 3.77%
is trading at a forward P / E of 9.8, while General Motors Co. GM,
+ 3.93%
is trading at a futures P / E of 8.7. Meanwhile, auto parts retailers are selling a lot more, with O’Reilly Automotive Inc. ORLY,
+ 2.05%
at a forward P / E of 21.6, AutoZone Inc. AZO,
+ 7.08%
to 18.3 and Advance Auto Parts Inc. AAP,
+ 2.16%
to 17.4.

Read: AutoZone stock leaps after big profits and exceeded sales expectations, as gross margins decline

The Wall Street Perspective

Here are the expected compound annual growth rates (CAGRs) of sales for the six dealers, based on consensus estimates through to the 2023 timeline among analysts polled by FactSet. Sales figures are in millions.

Society Teleprinter Estimated turnover – 2021 Estimated turnover – 2022 Estimated turnover – 2023 CAGR of sales estimated over two years

CarMax inc.

KMX,
+ 4.19%

$ 27,946

$ 30,102

$ 30,372

4%

Lithia Motors inc.

BOY,
+1.78%

$ 22,700

$ 27,224

$ 32,416

19%

AutoNation Inc.

A,
+ 0.12%

$ 25,726

$ 27,369

$ 28,384

5%

Asbury Automobile Group Inc.

ABG,
-1.41%

$ 9,623

$ 15,236

$ 16,290

30%

Group 1 Automobile Inc.

GPI,
+ 0.68%

$ 13,676

$ 16,343

$ 18,034

15%

Sonic Automotive Inc. Class A

SAH,
+ 0.82%

$ 12,343

$ 16,890

$ 18,684

23%

Source: FactSet

Here’s a summary of the opinions of brokerage analysts surveyed by FactSet:

Society Teleprinter Share “buy” notes Share neutral notes Share reviews “sell” Closing price – December 6 Consensus price target Implied 12-month upside potential

CarMax inc.

KMX,
+ 4.19%

61%

33%

6%

$ 144.50

$ 152.15

5%

Lithia Motors inc.

BOY,
+1.78%

80%

13%

7%

$ 293.88

$ 469.15

60%

AutoNation Inc.

A,
+ 0.12%

33%

67%

0%

$ 124.57

$ 156.13

25%

Asbury Automobile Group Inc.

ABG,
-1.41%

60%

40%

0%

$ 174.24

$ 249.25

43%

Group 1 Automobile Inc.

GPI,
+ 0.68%

67%

33%

0%

$ 206.08

$ 270.50

31%

Sonic Automotive Inc. Class A

SAH,
+ 0.82%

67%

22%

11%

$ 50.14

$ 71.14

42%

Source: FactSet

CarMax has 61% “buy” or equivalent ratings. However, the stock is close to its target price. Analysts see a high double-digit rise for everyone else, even though only a third rate AutoNation at a buy.

How does Tesla fit in?

Asked about the long-term viability of new car dealers, in light of Tesla Inc.’s TSLA,
+ 3.45%
A non-dealer distribution model for its electric vehicles, Dineen said, “What really matters to us is valuation.”

“There is no doubt that Tesla is a great company,” he said, but added that Tesla’s shares are “valued to take 100% of electric vehicle sales”.

“When we look at the automobile in general, we think dealerships make the most sense,” he said.

Don’t miss: Tesla shares are still cheap, says head of new ETF that made Musk’s electric vehicle company No.1


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