Auto Dealers In The Fast Lane Amid Favorable Trends
How many of your neighbors are suddenly driving new cars?
Auto sales are rebounding as cautious Americans who held onto their cars through the economic downturn are now trading up to newer vehicles. Sales of new cars rose 17% in August, reaching an annualized rate of 16.09 million -- not a record, but the fastest pace since December 2007.
AutoNation ( AN ), the dealership chain with the largest revenue, reported Thursday its new car sales soared a whopping 32% in August. Its sales of luxury-premium category vehicles swelled 37%.
Auto dealerships of all stripes have upshifted financially as more consumers commit to buying new cars and a rising number of willing lenders are helping them do so.
The 10 auto dealership chains tracked in IBD's Retail-Wholesale-Automobile industry group have all seen sales and earnings tick higher in recent quarters. Most have also set new stock highs over the last month.
Analysts expect the financial gains to continue in coming years as the industry puts more distance between itself and the beating it took during the recession of 2008 and 2009.
"There are a number of things pushing growth in the industry right now -- pent-up demand from buyers, better access to financing, an onslaught of new products and technologies," said Larry Dixon, senior automotive analyst at the National Automobile Dealers Association ( NADA ). "The whole industry has benefited."
In terms of stock price, collectively, the auto dealers' industry group is up 34% since the beginning of the year. It ranked No. 29 on Friday among IBD's 197 industries. In addition to AutoNation,CarMax ( KMX ),Penske Automotive Group ( PAG ) andGroup 1 Automotive ( GPI ) are the group's largest players.
Aging Cars, Access To Credit
Before the industry's August sales report, most industry researchers forecast that sales of new vehicles will reach about 15.5 million units this year, up from 14.4 million in 2012. Even the most optimistic upwardly revisions are still well below the peak of 16.6 million units sold a decade ago. The trough occurred in 2009, when only 10.4 million vehicles were sold.
One of the key drivers of the recent growth is the nation's aging fleet of cars. The average age of cars on the road is about 11.5 years, according to industry estimates. That's well above the average of nine years established a few years ago.
"Consumers held on to their vehicles during the recession longer than would have otherwise, and now many of them are ready to get back into the market," Dixon said.
And thanks to easing financing requirements by lenders, more consumers are able to secure car loans than during the recession's lockdown years.
"We've seen a big improvement in access to financing," said Thomas King, a senior director at industry researcher J.D. Power & Associates. "Credit restrictions were heightened during the recession, so we saw a lot of lower credit customers get out of the market. A lot of those issues have subsided over the last couple of years, which has helped the industry tremendously."
Improving Vital Signs
AutoNation operates 221 dealerships plus 265 franchises across the U.S. Penske Group's chain includes 334 dealerships in the U.S. and the U.K.Sonic Automotive (SAH) and Group 1 Automotive operate more than 100 dealerships each. CarMax runs 118 dealerships, but focuses strictly on used car sales.
The group's top stock has been Oregon-basedLithia Motors (LAD), which owns 87 dealerships serving small metropolitan or rural areas. The company works to lock down exclusive brand representation within its given markets: to be the only Ford, GM or Dodge dealership, for example.
That strategy pushed sales ahead 23% last year, with estimates for a 20% gain this year. By comparison, AutoNation's sales are forecast to gain 12% this year. Analysts project a 10% gain for Penske.
The industry is also home to other kinds of auto-related players.Kar Auction Services (KAR) conducts car salvage-used vehicle auctions via more than 200 physical locations as well as multiple Internet venues.Rush Enterprises (RUSHA) operates commercial vehicle dealerships.Lentuo International (LAS) is a small operator attempting to build a network of dealerships in China, whileChina Auto Logistics (CALI) distributes vehicles to dealers and other auto sellers there.
AutoNation logged $15.7 billion in revenue last year and has reported seven straight quarters of double-digit sales and earnings gains. The company has also recorded record EPS each of those quarters.
"That just shows you the industry is healthy when each quarter you are growing year-over-year," said Marc Cannon, AutoNation's senior vice president of corporate communications and public policy.
Penske, which ranks No. 2 in sales, has logged double-digit sales and earnings growth in five of the last quarters.
No. 3 CarMax has run off three straight quarters of double-digit sales and earnings growth, while No. 4 Group 1 has grown the top and bottom lines in double digits in six of the last seven quarters.
While new car sales have driven much of the growth, dealers also have benefited from a bigger focus on used car sales, the NADA's Dixon says.
"Used vehicle operations have done very well for them over the past few years," he said. "They have placed greater emphasis on used vehicle sales than they did before the recession because they have had to deal with more cost-conscious consumers."
In addition, dealers have put a bigger emphasis on efficiency to help them stay competitive.
"Like many industries, the car dealership industry has become increasingly competitive," Dixon said. "Most dealerships are running leaner and meaner than they were certainly before the recession."
Technology, Luxury Sales
Although different industry researchers have different estimates for new-car sales this year, most expect a healthy increase from 2012.
According to an Aug. 28 report from "Automotive News," TrueCar.com forecasts an annual rate of 15.75 million units sold this year. Kelley Blue Book forecasts 15.6 million units, while Wells Fargo forecasts 15.5 million to 15.6 million.
A joint forecast from J.D. Power and LMC Automotive puts the number at 16 million. If that happens, it will be the first time since 2007 that sales topped 16 million for the full year.
The annualized rate at the end of July was 15.9 million units, according to the NADA data. Through July, total light vehicle sales for the year totaled 9.1 million units, up 8% from the previous year. August pushed the number to 10.6 million, 10% above the year-ago level.
In addition to more sales, the industry has benefited from a willingness on the part of buyers to spend more money on cars.
"We've seen the transaction prices rise about 3% year to date," said J.D. Powers' King. "There has been a general shift toward more expensive vehicles."
Technology also has become a more central factor in sales. Dealerships obviously don't create the gizmos that go into new cars and trucks, but they benefit from recent advances.
"If dealers feel that new technology will increase their probability of success, they certainly will sell it," Dixon said.
"The big thing" in automotive technology is smartphone connectivity, he said. Today's systems go beyond merely connecting a phone to the car's system. Technology now includes having the smartphone interact with the car.
Rear-view cameras have also gained traction with buyers -- so much so that these cameras are now standard on all Honda vehicles.
"Just a few years ago these were only available only on luxury cars," Dixon said. "Now you see them available in all types of vehicles."
Meanwhile, dealerships are also touting lane departure warning systems, which set off a visual or audible alarm when drivers drift over to the next lane; and adaptive cruise control systems that tell drivers when they are creeping too close to the cars in front of them.
Most industry analysts have an upbeat outlook for car dealers. In addition to better access to financing and an aging fleet of cars on the road, dealers have gotten a boost from a rebound in the construction industry, particularly housing.
"Large pickup truck sales continued to outperform (in July) and the outlook remains positive, driven by the housing and construction recovery," Keybanc Capital Markets analyst Brett Hoselton noted in an Aug. 23 industry report.
He says large pickup truck volume increased 23% year-over-year in July "and continued to outperform the industry." This has given a particular boost toLithium Motors (LAD), which Hoselton estimates gets 25% to 30% of its sales from pickups.
AutoNation's Cannon says all types of vehicles have been selling well in recent months.
"You seeFord (F) again having another good year, and you also see that with other domestic carmakers," he said. "Toyota is back on track. The luxury business is also growing. We are seeing strength in all categories right now."