Car sales are rising off recent pandemic lows. It is a good sign for many beaten-up car stocks—and a good sign for the economy.
Light-vehicle sales have risen for six straight weeks. “[J.D. Power] now expects May retail auto sales to be down 16% to 26%,” Credit Suisse analyst Dan Levy wrote in a Thursday research report. “Far better than the [down] 52% they expected just 7 weeks ago.”
(ticker: AN) noted similar trends on its May 11 earnings conference call. “Same-store new and used retail unit sales were down approximately 20% in the final 10 days of April compared with down approximately 50% in the first 10 days of the month,” CEO Michael Jackson said. Florida, Texas and California are three regions seeing big bounces. Texas sales, for instance, were down only about 5% year over year by the end of April.
“Down 20% in May equates to a SAAR of about 13.5 million,” Benchmark analyst Mike Ward said. SAAR is short for seasonally adjusted annualized rate and is how U.S. car sales are typically reported. U.S. SAAR came in at 8.6 million, down almost 50% from April 2019.
Sales declines during the pandemic have pummeled stock prices. The automotive universe—with the exception of
(TSLA)—is down a lot, between roughly 30% and 70% year to date, worse than comparable drops of the
Dow Jones Industrial Average
Detroit based auto maker stocks are down about 45%. Dealership stocks are off by almost 40%. Parts suppliers have held up a little better, dropping about 30% in 2020.
Tesla shares, as the outlier, are up almost 90% year to date.
The improving SAAR isn’t quite reflected in stock prices. Ward and Levy have several Buy-rated stocks on their coverage lists.
Levy, for starters, also noted in his report that light trucks are still strong. That is a positive sign for
(GM). It has the most exposure, relatively speaking, to truck sales. What’s more, its stock is down about 41% year to date and trades for less than 6 times estimated 2021 earnings. Levy’s price target is $33. Ward also rates GM stock Buy and has a $29 price target for shares.
Levy and Ward both rate GM’s main truck competitor,
(F), the equivalent of Hold.
There is also some agreement between the two analysts on parts suppliers. Both like
(APTV), whose shares are down about 36% year to date and trade for roughly 15 times estimated 2021 earnings. The multiple for Aptiv is higher than other automotive stocks, such as GM, because it makes equipment for autonomous driving and vehicle electrification, two big trends in the auto industry.
Levy thinks Aptiv stock is worth $80. Ward is a little more bullish. His price target is $87. Aptiv stock closed on Wednesday at about $61 a share.
Ward also covers the auto dealers, another group that benefits from improving domestic car sales. He rates AutoNation the equivalent of Hold, but has a Buy rating on
Group 1 Automotive
(SAH). His price targets for those three are $136, $79 and $27.5, respectively. That is up about 40%, 80% and 45% from recent trading levels.
“Unlike any downturn in the past,” Ward said when talking about what has been going on in his sector. But, “the industry is in good shape financially without a need for a major cost or product restructuring.”
The stocks don’t reflect better positioning. Investors may be stuck in the past, recalling the bankruptcies, bailouts and restructuring of the 2008-09 financial crisis. It might not feel like it to investors, but things are a little better for the industry in 2020.
Write to Al Root at firstname.lastname@example.org
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