The U.S. automotive industry witnessed a 14.6% decline in new-vehicle sales in 2020 due to the worst recession the nation has suffered since the Great Depression in the 1930s. However, the rising demand for secondhand cars and electric vehicles (EVs) have driven the auto industry to outperform the broader market since the second half of last year. This is evident in First Trust NASDAQ Global Auto Index Fund’s (CARZ) 43.9% returns over the past nine months compared to the SPDR S&P 500 ETF Trust’s (SPY) 20.1% gains.
The auto industry’s recovery is expected to accelerate in tandem with the global economic recovery. The global motor vehicle and parts dealers' market is expected to grow at a 7% CAGR over the next five years to reach $5.68 trillion by 2025.
Given this growth potential, we think it could be wise to invest in the stock of auto dealers Penske Automotive Group, Inc. (PAG), Group 1 Automotive, Inc. (GPI), and Sonic Automotive, Inc. (SAH), which have immense upside potential but are trading at discounts to their peers.
Click here to check out our Automotive Industry Report for 2021
Penske Automotive Group, Inc. (PAG)
PAG is a diversified transportation services company that operates automotive and commercial truck dealerships internationally. The company sells new and used motor vehicles and related products, vehicle and collision repair services, and the placement of finance and lease contracts, third-party insurance products, and other aftermarket products.
On April 13, PAG and its commercial vehicle subsidiary Premier Truck Group (PTG) completed the acquisition of Kansas City Freightliner (KCFL), a retailer of medium- and heavy-duty commercial trucks. The acquisition will further scale its business within Premier Truck Group by providing services to the customers of both companies and is expected to generate $450 million in annualized revenue.
In March, PAG adopted CarShop, a U.K.-based dealer of used automotive vehicles, as its global brand for its used vehicle SuperCenters. Both companies will adopt one global CarShop brand, and they hope to operate in 40 locations, grow annual sales to 150,000, and increase revenue to $2.50 - $3 billion by 2023.
For its fiscal year 2021 first quarter, ended March 31, the company’s revenue increased 15.3% year-over-year to $5.77 billion. Its gross profit increased 17.6% year-over-year to $913.20 million. Its operating income came in at $219.60 million, up 106.4% from its prior-year period. Its net income is reported $182.50 million for the quarter, which represents a 253.7% rise year-over-year. Its EPS increased 253.1% year-over-year to $2.26.
Analysts expect PAG's EPS to improve 248.2% year-over-year to $1.95 for the current quarter, ending June 30 It surpassed the Street’s EPS estimates in each of the trailing four quarters. And its $5.83 billion consensus revenue estimate for the current quarter represents a 59.7% rise on a year-over-year basis. The stock’s EPS is expected to grow at a rate of 5.6% per annum over the next five years. The stock has gained 159.2% over the past year and closed yesterday’s trading session at $86.61.
It’s no surprise that PAG has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock also has an A grade for Growth and Value, and a B grade for Momentum and Sentiment. Click here to see the additional POWR Ratings for PAG (Stability and Quality).
PAG is ranked #1 of 25 stocks in the B-rated Auto Dealers & Rentals industry.
Group 1 Automotive, Inc. (GPI)
GPI participates in the automotive retail industry and operates in the United States, U.K. and Brazil. The company sells new and used cars, light trucks and related parts, as well as service and insurance contracts, offers automotive maintenance and repair services, and arranges related vehicle financing through its dealerships.
In March, GPI acquired two Toyota dealerships located in Massachusetts. The dealerships are expected to generate approximately $120 million in annualized revenues.
GPI’s total revenues came in at $3.01 billion for its fiscal year 2021 first quarter, ended March 31,which represents an 11.9% improvement year-over-year. The company’s gross profit increased 17.8% year-over-year to $490.70 million. Its non-GAAP income from operations was reported at $153.70 million for the quarter, up 117.1% from the prior-year period. While its non-GAAP net income increased 235.6% year-over-year to $102.70 million, its non-GAAP EPS increased 235.5% year-over-year to $5.57.
A $5.09 consensus EPS estimate for the current quarter, ending June 30, 2021, represents a 35% improvement year-over-year. The stock has surpassed analysts’ EPS estimates in three of the trailing four quarters. The $2.98 billion consensus revenue estimate for the same quarter represents a 39.6% rise year-over-year. The stock has rallied 232.6% over the past year to close yesterday’s trading session at $156.77.
GPI’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to Strong Buy in our POWR Ratings system.
The stock also has an A grade for Value and Growth, and a B grade for Momentum and Quality. In addition to the POWR Ratings grades we’ve just highlighted, one can see GPI’s ratings for Sentiment and Stability here.
GPI is ranked #3 in the same industry.
Sonic Automotive, Inc. (SAH)
SAH is a n automotive retailer that sells new and used cars and light trucks, replacement parts. It performs vehicle maintenance, warranty, paint and repair services and arranges extended service contracts, financing, insurance, vehicle protection products and other aftermarket products for automotive customers.
In April, SAH announced the opening of its newest EchoPark specialty used vehicle store in Birmingham, Alabama. Birmingham has been a great market for SAH’s new vehicle business for many years, and as pandemic travel restrictions ease, the company hopes to see continued strong demand for used vehicles and a rapid growth for its EchoPark brand, based on its inventory selection, attractive pricing and unique guest experience.
With the March 16 acquisition of Carbiz, an online car dealership business in Baltimore, U.S., SAH expanded its EchoPark specialty used vehicle network into the greater Baltimore-Washington metro area. This should help the company progress towards its goal of achieving a 140-point nationwide distribution network, retail 575,000 vehicles annually and generate $14 billion in EchoPark revenues by 2025.
SAH’s total revenues have increased 20.7% year-over-year to $2.79 billion for its fiscal year 2021 first quarter, ended March 31. The company’s gross profit increased 14.4% year-over-year to $400.89 million. Its operating profit came in at $87.85 million for the quarter, compared to a $221.88 million operating loss in the first quarter of 2020. SAH’s net income is $54.22 million, compared to a $199.33 million net loss in the prior-year period. Its adjusted EPS increased 207.5% year-over-year to $1.23.
For the current quarter, ending June 30, 2021, analysts estimate SAH’s EPS to be $1.22, which represents an 87.7% rise year-over-year. It surpassed the Street’s EPS estimates in each of the trailing four quarters. The $2.94 billion consensus revenue estimate for the same quarter represents a 39% rise year-over-year. The stock has gained 138.4% over the past year to close yesterday’s trading session at $48.20.
SAH’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system.
The stock has an A grade for Value, and a B grade for Momentum. We have also graded SAH for Growth, Stability, Sentiment and Quality. Click here to access all SAH’s ratings.
SAH is ranked #7 in the same industry.
Click here to check out our Automotive Industry Report for 2021
PAG shares were trading at $89.19 per share on Thursday afternoon, up $2.58 (+2.98%). Year-to-date, PAG has gained 51.15%, versus a 10.59% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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