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Any Deals At The Auto Mart?
If you are like most Americans, buying a car can be a frustrating process due to the large amount of choices and the salespeople that are trying to put you in a car that day. That being said, I am not against making money by investing in the car dealerships that sell both new and used vehicles across the United States.
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The U.S. auto sales for June was a mixed bag as the number of vehicles sold fell from the month of May, but were up double-digits from one year earlier. During the first half of the year the industry averaged an annualized sales number of 11.15 million vehicles and in June the number came in at 11.08 million vehicles. Keep in mind the number may be below what analysts had expected in 2010, but should end the year much higher than the 10.6 million vehicles sold in 2009.
The Leading Dealers
Even with the sales number mixed, there appears to be a few gems in the auto dealership sector based on valuation and the recent weakness in the stocks. The largest auto dealership in the U.S. is CarMax (NYSE:KMX) with a market capitalization of $4.4 billion; AutoNation (NYSE:AN) is the number two with a market cap of $3.2 billion.
When CarMax reported quarterly earnings in June it surprised the analysts with revenue that increased to $2.26 billion from $1.83 billion one year earlier. Earnings per share also jumped to 44 cents per share from 13 cents the same quarter last year. But even with the strong numbers, investors continue to shun shares of the auto dealer. With a P/E ratio of 12.6 the stock remains attractive, but overall market weakness and the lack of faith in autos have hurt the performance.
The AutoNation stock performance has held up better in 2010 than KMX and the overall market, gaining 2% through the first six months of the year and hitting a one-year high in mid-June. Fundamentally the stock trades with a P/E ratio of 15.2, a little higher than KMX, but the PEG ratio is less than one and this has the stock trading at an attractive long-term valuation. One major difference between the two companies is that AN sells both new and used vehicles, whereas KMX concentrates on used. (For related reading, see Move Over P/E, Make Way For PEG.)
America's Car-Mart (NYSE:CRMT) is a small used car dealership that has nearly 100 stores located in the south-central United States that is targeting the rural customer. Fundamentally the company is the most attractive of the sector with a P/E ratio of 10.2 and a PEG ratio of 0.58. The performance of the stock does not reflect the numbers as it fell 14% during the first half of 2010.
Auctioneers
Two stocks that are directly related to the auto selling business are Copart (Nasdaq:CPRT) and KAR Auction Services (NYSE:KAR). CPRT provides online auction sites that are used by car dealerships, insurance companies, banks, salvage operations and more. KAR is a similar company without the large online presence that focuses on auctions and the car salvage business. Considering the rough economic times for many car owners, the salvage business sounds like a good industry to be a part of. Fundamentally both companies pale in comparison to the auto dealerships. (For more, see Top 10 Ways To Get Top Dollar For Your Car.)
Fighting the Trend
The trend is obviously not in the favor of the auto dealerships and auctioneers; however, taking the contrarian view often does wonders for investors. As bad as the economy may be, people need to drive to live a normal life and this is where the used car dealers in mid-America will thrive versus the new car dealerships. That being said the new car incentives are very attractive. It really depends on who you talk to. (For more, see Wheels Of Future Fortune.)
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IN PICTURES: 20 Tools For Building Up Your Portfolio
The U.S. auto sales for June was a mixed bag as the number of vehicles sold fell from the month of May, but were up double-digits from one year earlier. During the first half of the year the industry averaged an annualized sales number of 11.15 million vehicles and in June the number came in at 11.08 million vehicles. Keep in mind the number may be below what analysts had expected in 2010, but should end the year much higher than the 10.6 million vehicles sold in 2009.
The Leading Dealers
Even with the sales number mixed, there appears to be a few gems in the auto dealership sector based on valuation and the recent weakness in the stocks. The largest auto dealership in the U.S. is CarMax (NYSE:KMX) with a market capitalization of $4.4 billion; AutoNation (NYSE:AN) is the number two with a market cap of $3.2 billion.
When CarMax reported quarterly earnings in June it surprised the analysts with revenue that increased to $2.26 billion from $1.83 billion one year earlier. Earnings per share also jumped to 44 cents per share from 13 cents the same quarter last year. But even with the strong numbers, investors continue to shun shares of the auto dealer. With a P/E ratio of 12.6 the stock remains attractive, but overall market weakness and the lack of faith in autos have hurt the performance.
America's Car-Mart (NYSE:CRMT) is a small used car dealership that has nearly 100 stores located in the south-central United States that is targeting the rural customer. Fundamentally the company is the most attractive of the sector with a P/E ratio of 10.2 and a PEG ratio of 0.58. The performance of the stock does not reflect the numbers as it fell 14% during the first half of 2010.
Auctioneers
Two stocks that are directly related to the auto selling business are Copart (Nasdaq:CPRT) and KAR Auction Services (NYSE:KAR). CPRT provides online auction sites that are used by car dealerships, insurance companies, banks, salvage operations and more. KAR is a similar company without the large online presence that focuses on auctions and the car salvage business. Considering the rough economic times for many car owners, the salvage business sounds like a good industry to be a part of. Fundamentally both companies pale in comparison to the auto dealerships. (For more, see Top 10 Ways To Get Top Dollar For Your Car.)
Fighting the Trend
The trend is obviously not in the favor of the auto dealerships and auctioneers; however, taking the contrarian view often does wonders for investors. As bad as the economy may be, people need to drive to live a normal life and this is where the used car dealers in mid-America will thrive versus the new car dealerships. That being said the new car incentives are very attractive. It really depends on who you talk to. (For more, see Wheels Of Future Fortune.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Matthew McCall
Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.
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