Considering the current market volatility and decline in U.S. car sales amid an economic slowdown, it may not make sense to bet on auto dealership stocks that could plunge due to their fundamental weakness or the industry headwinds. CarMax (KMX), Asbury Automotive (ABG), and Sonic Automotive (SAH) have weak financials and growth prospects. So, these stocks are best avoided now.
According to RBC Capital Markets, the May U.S. light-vehicle seasonally adjusted annualized rate (SAAR) of sales came in at 12.80 million vehicles, 4.5% below its forecast and down 12.3% from April due to low inventories amid a persistent shortage of semiconductors and record-high vehicle prices.
Intensified supply chain disruptions and rising energy and commodity prices due to the Russia-Ukraine war further affected sales. Moreover, with further aggressive monetary policy tightening by the Fed increasing the likelihood of a recession, analysts are warning of a slowdown in car sales.
Given this backdrop, it doesn’t make sense to invest in auto dealership stocks CarMax, Inc. (KMX), Asbury Automotive Group, Inc. (ABG), and Sonic Automotive, Inc. (SAH) as they do not possess enough fundamental strength and growth prospects.
CarMax, Inc. (KMX)
KMX operates as a retailer of used vehicles. The company operates through two segments, CarMax Sales Operations, and CarMax Auto Finance. It offers customers a range of makes and models of used vehicles, including domestic, imported, and luxury vehicles.
KMX’s net revenue increased 48.8% year-over-year to $7.69 billion for the fiscal fourth quarter ended February 28, 2022. However, its net earnings decreased 23.9% year-over-year to $159.80 million. In comparison, its EPS for the quarter came in at $0.98, down 22.8% year-over-year.
Analysts expect KMX’s revenue to increase 4.5% year-over-year to $33.33 billion in fiscal 2023. However, the company’s EPS is expected to decrease 15.6% year-over-year to $5.88 in fiscal 2023. The stock has lost 31.3% over the past six months to close yesterday’s trading session at $102.24.
KMX’s poor prospects are apparent in its POWR Ratings. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a D grade for Quality, Growth, and Sentiment. Click here to see the additional POWR ratings for KMX (Momentum, Value, and Stability). It is ranked #24 out of 25 stocks in the Auto Dealers & Rentals industry.
Asbury Automotive Group, Inc. (ABG)
ABG operates as an automotive retailer. It offers a range of automotive products and services, vehicle repair and maintenance services, replacement parts, and collision repair services. The company owns and operates 205 new vehicle franchises representing 31 brands of automobiles at 155 dealership locations; and 35 collision centers in the United States.
ABG’s net revenue increased 78% year-over-year to $3.91 billion for the fiscal first quarter ended March 31, 2022. However, its selling, general, and administrative expenses increased 90% year-over-year to $455.50 million. Also, total current assets came in at $1.81 billion for the period ended March 31, 2022, compared to $1.93 billion for the period ended December 31, 2021.
For fiscal 2023, Analysts expect ABG’s revenue to increase 6.9% year-over-year to $17.06 billion. However, its EPS is expected to decline 7.6% year-over-year to $32.36 in fiscal 2023. The stock has lost 2.7% over the past month to close yesterday’s trading session at $186.43.
ABG’s weak fundamentals are reflected in its POWR Ratings. It has a D grade for Sentiment and Stability. Click here to see ABG’s Growth, Value, Momentum, and Quality ratings. In addition, ABG is ranked #14 in the same industry.
Sonic Automotive, Inc. (SAH)
Automotive retailer SAH operates in two segments, Franchised Dealerships, and EchoPark. The company operates 140 new vehicle franchises representing 28 brands of cars and light trucks, 17 collision repair centers in 17 states, and 46 EchoPark stores in 16 states, including 11 Northwest Motorsport pre-owned vehicle stores.
SAH’s net revenue increased 28.7% year-over-year to $3.59 billion for the fiscal first quarter ended March 31, 2022. However, its selling, general, and administrative expenses increased 33.7% year-over-year to $387 million. Also, its EchoPark segment loss came in at $34.90 million, compared to a profit of $2 million in the year-ago period.
Analysts expect SAH’s revenue to increase 9.2% year-over-year to $17.58 billion in fiscal 2023. However, the company’s EPS is expected to decrease 9.1% year-over-year to $9.31 in fiscal 2023. The stock has lost 12.8% over the past three months to close yesterday’s trading session at $44.53.
SAH’s POWR Ratings are consistent with this bleak outlook. In addition, the stock has a D grade for Sentiment. Click here to see SAH’s ratings for Quality, Momentum, Value, Growth, and Stability. In addition, SAH is ranked #11 in the Auto Dealers & Rentals industry.
KMX shares were unchanged in premarket trading Friday. Year-to-date, KMX has declined -23.27%, versus a -15.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal’s fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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