Tickers in this Article: SAH, PAG, GPI, AN
As car owners retain their vehicles for a longer period of time, it would make sense that the auto dealers would be suffering. However, that is not the case for the majority of auto dealerships located in the United States as their soaring stock prices have suggested. A study shows that vehicle owners are holding onto their new cars for a period of six years before purchasing a new vehicle. Used cars are being retained for approximately four years. The same study showed the average age of vehicles on the road is 10.8 years.

My thought process is if the auto dealerships can make it through the rough times, when sales begin to pick up it will lead to even higher stock prices. For more, see Earning Forecasts: A Primer.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

The Dealers
Sonic Automotive
(NYSE:SAH) operates 119 dealership locations as of the middle of 2011 as well as 24 collision repair centers in 15 states. Fundamentally, the company is undervalued based on earnings and growth. The PEG ratio is 0.71 and the price-to-sales ratio is 0.12. The forward P/E ratio is 9.7 and the stock pays a 0.5% dividend. The fundamentals suggest a buying opportunity and the chart is just as strong with a new three-year high set last week. A pullback to the $17 area would be the next buying point for the stock.

Penske Auto Group (NYSE:PAG) has a similar chart to Sonic, as it also recently traded at the best level in years. As of the end of 2011, the company operated 320 retail automotive franchises with 166 in the U.S. and the majority of the remainder in the U.K. Fundamentally, Penske is also attractive with a PEG of 0.66, price-to-sales ratio of 0.19, a forward P/E of 11.0 and a 1.6% dividend yield. The stock has support between the $23 and $24 area and would be a buy on a pullback to the buy zone.

AutoNation (NYSE:AN) owned and operated 258 new vehicle franchises from 215 stores located mainly in metropolitan areas as of the end of 2011. The chart of AutoNation is not as attractive as its peers, but it is holding near the lower end of a multi-month trading range. As long as the company can hold above $31, the stock will remain in a long-term bullish trend and would be a buying opportunity at that time. Fundamentally, the stock trades with a PEG of 0.77, price-to-sales ratio of 0.32, forward P/E of 13.6 and no dividend yield.

Group 1 Automotive (NYSE:GPI) pretty much falls in line with the other stocks in the sector. The company owned and operated 104 dealership locations and 25 collision service centers in the U.S. and a few in the U.K. It also hit a multi-year high recently and has attractive fundamentals. The PEG is 0.66, price-to-sales ratio 0.19, forward P/E 11.3 and a 1.0% dividend yield.

The Bottom Line
Even though the auto market as a whole has been able to hold up well during rough times, there could be more pitfalls ahead. If the global issues in Europe spread to the U.S. and causes a double-dip recession, it would directly affect all big ticket purchases such as automobiles. There is also a potential for interest rates to rise, which in turn would increase the cost of borrowing when purchasing a new or used vehicle. On the flip side, it the economy continues to improve and interest rates remain low, look for new highs for the sector. For additional reading, check out 5 Must-Have Metrics For Value Investors.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

comments powered by Disqus

Trading Center