A sales surge might make this industry your best stock market play for 2022

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It’s been quite a year for many industries, and not just the rebound in sales that caused so many businesses to be temporarily closed during the early stages of the coronavirus pandemic.

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Unprecedented stimulus payments by the federal government to consumers have helped offset the lack of demand, and along with component supply disruptions, the most obvious distortion has been seen at auto-dealer lots.

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That’s why David Dineen, chief investment officer for global small-caps at Spouting Rock Asset Management, believes the three big auto-dealer chains are well positioned for stock-price gains in 2022 and beyond.

“We are coming out of a difficult sell-off for new cars for this economic cycle,” he said during an interview.

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Spouting Rock Asset Management is based in Bryn Mawr, Penn., and has $3.1 billion in assets under management.

According to the Bureau of Economic Analysis, sales of new cars and light trucks declined at a seasonally adjusted annual rate (SAAR) of 14.4 million units in October, from 18.8 million in April due to a supply crunch.

Federal Reserve Bank of St. Louis

Dinin described October SAAR as “a bearish level”, underscoring an opportunity for investors, as auto dealers trade at lower valuations than auto manufacturers and parts suppliers.

Bad ‘comps’ for many industries in 2022

When covering financial results, Wall Street analysts and the financial media are judged on year-over-year comparisons due to seasonality. But those “comps” can present a confusing picture. For example, an industry whose sales fell in the first quarter of 2020 during the early days of the coronavirus pandemic may have shown stellar “recovery” a year later, even though its sales are close to recovering to pre-pandemic levels. Haven’t come

Artificially high year-on-year growth in sales, profit or cash flow this year could be followed by a much slower growth rate as business in various industries move closer to pre-pandemic norms.

According to Dineen, “you’ll have harder compasses for more consumption in 2022.”

And that’s why he thinks big dealers selling new cars are a good place for investors who want to play another pandemic game.

Low Valuations for Auto Dealers

Auto dealers as a group have faced “re-ratings” by investors as a lack of new cars has led to a decline in sales, while price increases and a shortage of older cars have created.

To illustrate how this affected stock valuations relative to earnings, we looked at six auto dealers included in the S&P 1500 Composite Index SP1500,
+1.25%
(The S&P 500 is made up of the SPX,
+1.17%,
S&P 400 Mid Cap Index MID,
+1.99%
and S&P Small Cap Index SML,
+2.41%
Here’s how the price-to-earnings ratios have fared for the six car dealers since the end of 2019:

factset

Forward P/E ratios among analysts surveyed by FactSet are based on rolling 12-month earnings estimates. Click on the ticker for more information about each company. Click here for Tommy Kilgore’s detailed guide to a wealth of information for free on the Businesshala Quotes page.

The exception to the downward P/E movement for these dealers is CarMax Inc. KMX has been
+1.28%,

“CarMax has made the most of the used car market, which has come under fire,” Dinin said. The other five dealers on the chart sell both new and used vehicles. Looking ahead over the next two years, as the supply chain likely recovers and new-car production rebounds, he is looking forward to AutoNation Inc. Supports AN,
+0.43%,
Asbury Automotive Inc. ABG,
+4.44%,
and Sonic Automotive Inc. sah,
+5.31%
For growth in P/E ratio and share prices.

For CarMax, comparisons could be “slippery” over the next two years if the market for older cars cools off a return to sales levels for new cars in 2019 or 2020, Dineen said.

Here’s a simple way to compare the current forward P/E ratios for the six dealers in the Composite 1500 to their pre-pandemic levels. The list is sorted by market capitalization:

company

anchor

market cap. ($ million)

Forward P/E – December 3, 2021

Forward P/E – December 31, 2019

Average Forward P/E as on 31st December 2019

Carmax Inc.

KMX,
+1.28%

$23,425

19.5

15.9

20.1

Lithia Motors Inc.

Boy,
+1.06%

$8,899

7.8

11.4

13.1

Autonation Inc.

One,
+0.43%

$8,164

6.9

10.3

9.6

Asbury Automotive Group Inc.

ABG,
+4.44%

$4,031

5.8

10.6

9.6

Group 1 Automotive Inc.

gpi,
+2.31%

$3,730

5.9

8.9

7.1

Sonic Automotive Inc. class A

saw,
+5.31%

$1,465

5.4

10.5

9.7

Source: FactSet

Unlike his favorite three dealers (Autonation, Asbury and Sonic), Dineen reported that the Ford Motor Company F,
+0.42%
Trades at a forward P/E of 9.8, while General Motors Company GM,
+0.22%
Trades at a forward P/E of 8.7. Meanwhile, O’Reilly Automotive Inc. With ORLY, auto-parts retailers do a lot of business,
+0.34%
On the forward P/E of 21.6, AutoZone Inc. AZO,
+0.91%
At 18.3 and Advance Auto Parts Inc. You,
+1.39%
at 17.4

AutoZone stock jumps after beating big gains and topping sales forecast, while gross margin declines

wall street view

Here’s the expected compound annual growth rate (CAGR) for sales across six dealers, based on consensus estimates through calendar 2023 among analysts surveyed by FactSet. Sales numbers are in the millions.

company

anchor

Estimated Revenue – 2021

Estimated Revenue – 2022

Estimated Revenue – 2023

Estimated sales CAGR for two years

Carmax Inc.

KMX,
+1.28%

$27,946

$30,102

$30,372

4%

Lithia Motors Inc.

Boy,
+1.06%

$22,700

$27,224

$32,416

19%

Autonation Inc.

One,
+0.43%

$25,726

$27,369

$28,384

5%

Asbury Automotive Group Inc.

ABG,
+4.44%

$9,623

$15,236

$16,290

30%

Group 1 Automotive Inc.

gpi,
+2.31%

$13,676

$16,343

$18,034

15%

Sonic Automotive Inc. class A

saw,
+5.31%

$12,343

$16,890

$18,684

23%

Source: FactSet

Here is a summary of the views surveyed by FactSet among analysts at brokerage firms:

company

anchor

Share “Buy” Rating

share neutral rating

Share “Sell” Rating

Closing Price – December 6

consensus price target

Implicit 12-Month Upward Potential

Carmax Inc.

KMX,
+1.28%

61%

33%

6%

$144.50

$152.15

5%

Lithia Motors Inc.

Boy,
+1.06%

80%

13%

7%

$293.88

$469.15

60%

Autonation Inc.

One,
+0.43%

33%

67%

0%

$124.57

$156.13

25%

Asbury Automotive Group Inc.

ABG,
+4.44%

60%

40%

0%

$174.24

$249.25

43%

Group 1 Automotive Inc.

gpi,
+2.31%

67%

33%

0%

$206.08

$270.50

31%

Sonic Automotive Inc. class A

saw,
+5.31%

67%

22%

1 1%

$50.14

$71.14

42%

Source: FactSet

CarMax has a 61% “Buy” or equivalent rating. However, the stock is close to its target price. Analysts see high double-digit growth for all others, even though AutoNation is only a third rate.

How does Tesla fit in?

When asked…

,

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