Used car prices are now declining after a rapid climb since January 2021. According to the Manheim Used Vehicle Value Index, prices declined across the board for all significant segments in July, and this trend continued into the first half of August. Used SUV and pickup prices have been declining at the greatest rate over the past two months, while used van and compact vehicle prices have only slightly decreased. The second half of August should also see reductions in wholesale used-car values, according to key indications.
According to BoA analyst John Murphy, the used car market is still in flux due to supply chain disruptions that might affect production and limit inventory on dealer lots well into 2023. However, the constricted inventory scenario could also develop actual pent-up demand for a more robust capital goods replacement cycle to be unleased on the other side.
Daniel Imbro, an analyst at Stephens, singled out a number of car shops with upside potential in an interview with Seeking Alpha against the backdrop of a normalized supply chain by mid to late 2023 and improving demand from rental firms. Firms in the industry support Group 1 Automotive (NYSE:GPI), as the sale of Brazilian assets, is anticipated to be profitable. Imbro also finds the recent report from the vehicle retailer and Carvana Co’s (NYSE:CVNA) acquisition of ADESA to be encouraging. With affordability being one of its main issues, falling used car costs are considered as potentially beneficial for CVNA. Imbro and his team believe CVNA has enough liquidity on its balance sheet to survive. Asbury Automotive Group (NYSE:ABG) and Lithia Motors (NYSE:LAD) is mentioned as being well positioned to outperform in the following year in other parts of the industry. With the market returning to normal and production restarting late in the next year, CarMax (KMX), which is also observed to be trading at a discount to CVNA, is thought to be an interesting investment.
Several auto retail stocks have performed better than the market so far this year, despite the market and supply chain unrest in 2022. On a year-to-date basis, Kingsway Financial Services (+11.6%), Penske Automotive Group (NYSE:PAG) (+9.3%), AutoNation (NYSE:AN)
(+7.4%), and Sonic Automotive (NYSE:SAH) (+4.0%) are all in black. The three companies with the largest losses were Cazoo Group (NYSE:CZOO), Vroom (NASDAQ:VRM), and Shift Technologies (SFT). The backdrop for VRM and SFT trading includes a significant degree of short interest.
Sonic Automotive (SAH) is regarded well on Wall Street and has the highest Seeking Alpha Quant Rating among auto retailers.
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