Used Car Market To Ride On Price Stability, Higher Demand

The automotive industry mainly accommodates two types of companies – a handful of multinational auto giants and numerous retailers. While the first group is mainly engaged in the production, designing and manufacturing of various types of vehicles, the latter group deals with both new and used vehicles.

Over the last few years, used car market has witnessed moderate growth. Despite the introduction of various models, intended to bridge the gap between luxury and budget cars, used car market has not been under any threat. However, in the later part of 2017, declining used car prices stemming from millions of leases nearing expiry date has been a concern for automakers who deal in used cars. In recent times, however, the demand for used cars has received a tremendous boost due to several factors. This has actually brightened the prospects of the auto companies which deal in used cars.

Advantage–Price Stability

In recent times, the demand for new vehicles has been badly hit due to several reasons. This decline is evident from February auto sales figures. Lower new vehicle sales witnessed by many automakers was a result of softening demand for vehicles by consumers following a lengthy boom phase. In fact, in February, strong sales of sports utility vehicles (SUVs) and crossovers could not match the slide in pickup truck sales and resulted in the decline in overall sales of new vehicles.

A reversal in the automakers’ stance of offering higher discounts to buyers, a rise in interest rate and stringent credit conditions tamed consumer demand and led to the consequent decline in new vehicles sales. In addition to these, the lucratively priced, high-quality used vehicles inventory have prompted consumers to think over the alternatives to buying new cars. This resulted into higher demand for used vehicles and supported its prices through 2019. In fact, leading rating agency, Moody’s has projected that the used car and truck Consumer Price Index will suffer a year-over-year decline of 1.07% in 2019, whereas the decline was 3.63% in 2017. The rating agency further anticipates prices to stabilize in 2020.

The Likely Beneficiaries

The rise in demand in used cars is likely to benefit companies such as Penske Automotive Group, Inc. (NYSE:PAG) , CarMax, Inc. (NYSE:KMX) , AutoNation, Inc. (NYSE:AN) and Sonic Automotive, Inc. (NYSE:SAH) . All these companies witnessed moderate growth in revenues in their most recent quarters with CarMax posting the best figure of 11% year-over-year growth and AutoNation witnessing the lowest year-over-year revenue growth of 3.7%. Among the remaining two companies, Penske Automotive and Sonic Automotive witnessed revenue growth of 10.4% and 4.3%, respectively.

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Moreover, per a research report by Technavio, the increased use of dedicated online sites to sell used cars is having positive impact on the used car market. The presence of several online car sales sites has enabled buyers to pick out a used car through online sites.

Currently, while Penske Automotive carries a Zacks Rank #2 (Buy), CarMax, AutoNation and Sonic Automotive carries a Zacks Rank #3 (Hold), each. Moreover, Penske Automotive, CarMax, AutoNation and Sonic Automotive have an expected long-term growth rate of 7.9%, 14.8%, 8.5% and 3% respectively.

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Written By: Zacks Investment Research