The car rental industry is poised to witness growth due to a surge in pent-up travel demand after the pandemic, with the summer travel season expected to be a significant driver for this positive trend. Hence, fundamentally sound stock Asbury Automotive Group, Inc. (ABG) could be a solid buy.
However, prevailing macroeconomic conditions create uncertainty around the industry's prospects. Thus it could be wise to steer clear of fundamentally weak stocks America's Car-Mart, Inc. (CRMT) and Kaixin Auto Holdings (KXIN).
The automotive industry is flourishing by the increased demand for personal and commercial vehicles and technological advancements like electric and autonomous cars. The global automotive market is anticipated to experience growth from $23 billion in 2022 to $28.70 billion by 2030, exhibiting a CAGR of 4.5%.
Moreover, consumer car buying trends are heavily influenced by various factors, including the expensive nature of both new and used vehicles and the increased cost of gasoline. These factors drive consumers' popularity of battery Electric Vehicles (EVs).
In 2022, the global EV market was valued at approximately $205.58 billion, and it is projected to reach around $1.72 trillion by 2032, indicating a 23.1% CAGR.
While the rising prices owing to inflation could dampen the growth prospects of the auto industry, the automotive dealer market seems to have benefitted from the increased prices, contributing to its steady growth in 2023 and beyond.
For instance, IBIS World's report on new car dealers, used car dealers, and online car dealers indicate positive trends. In 2021, new car revenue witnessed a significant growth of 16%, followed by a 6% increase in used car revenue in 2022. Looking ahead, online auto sales are projected to rise by 2.7% through 2027.
Despite the positive growth prospects for the auto industry, it is crucial to remember that the industry is vulnerable to economic fluctuations. During economic downturns, consumer demand for vehicles tends to decline, potentially impacting sales, profitability, and overall industry stability.
With that being said, let us evaluate the fundamentals of the featured stocks in detail:
Stock to Buy:
Asbury Automotive Group, Inc. (ABG)
ABG operates as an automotive retailer in the United States. It offers a range of automotive products and services, including new and used vehicles, vehicle repair and maintenance services, replacement parts, and collision repair services.
On May 26, ABG announced that its board of directors had approved a new initiative allowing the repurchase of the company's common stock, with a total value of up to $250 million shares.
The newly approved authorization signifies ABG's renewed commitment to a critical aspect of its balanced capital allocation strategy. This decision is supported by their robust cash flow and strong balance sheet.
The stock's trailing-12-month ROCE and ROTA of 35.97% and 11.50% are 258.2% and 217.4% higher than the 10.04% and 3.62% industry averages, respectively. Likewise, its asset turnover ratio of 1.88x is 87.2% higher than the industry average of 1.01x.
ABG's total revenue for the first quarter (ended March 31, 2023) amounted to $3.58 billion, while its gross profit came in at $696.20 million. The company's net income and EPS amounted to $181.40 million and $8.37 for the same period, respectively.
During the same period, its cash and cash equivalents stood at $296.80 million, up 26.1% compared to $235.30 million as of December 31, 2022.
The consensus EPS estimate for the second quarter (ending June 30, 2023) is $8.04. The consensus revenue estimate for the current quarter is $3.73 billion. Moreover, the company has an excellent earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past nine months, the stock has gained 50.7% to close the last trading session at $226.48.
ABG's POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Value. In the 28-stock B-rated Auto Dealers & Rentals industry, it is ranked #9. To see additional ratings of ABG for Growth, Momentum, Stability, Sentiment, and Quality, click here.
Stocks to Avoid:
America's Car-Mart, Inc. (CRMT)
CRMT, through its subsidiaries, operates as an automotive retailer in the United States. The company primarily sells older model used vehicles and provides financing for its customers.
CRMT's trailing-12-month EBITDA and net income margins of 4.99% and 1.45% are 54.2% and 65.4% lower than the industry averages of 10.88% and 4.20%. Likewise, its trailing-12-month ROTA of 1.44% is 60.3% lower than the industry average of 3.62%.
For the fiscal 2023 fourth quarter that ended April 30, 2023, CRMT's total costs and expenses increased 23.6% year-over-year to $386.06 million. The company's net income and EPS amounted to $2.09 million and $0.32, declining 92.1% and 91.9% from the prior-year quarter. Also, its income before taxes slumped 93.4% from the year-ago value to $2.25 million.
Street expects CRMT's EPS for the first quarter of fiscal 2024 (ending July 31, 2023) to decrease 61.5% year-over-year to $0.77. Its revenue for the ongoing quarter is expected to be $346.02 million. Moreover, it failed to surpass the EPS estimates in each of the trailing four quarters.
The stock has lost 3.2% over the past five days to close the last trading session at $94.21.
CRMT's weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, which translates to Sell in our proprietary rating system.
It also has a D grade for Growth, Stability, and Sentiment. Within the same industry, it is ranked #19. Click here to see CRMT's ratings for Value, Momentum, and Quality.
Kaixin Auto Holdings (KXIN)
Headquartered in Beijing, the People's Republic of China, KXIN primarily sells domestic and imported automobiles. It focuses on automobile brands, such as Audi, BMW, Mercedes-Benz, Land Rover, Bentley, Rolls-Royce, and Porsche.
On March 28, KXIN received a notification letter from the listing qualifications department of the Nasdaq Stock Market, informing that as of March 28, 2023, the company's listed security did not meet the requirement of maintaining a minimum bid price of $1 per share, as stipulated by Nasdaq Rule 5550(a)(2).
However, the Nasdaq Staff has granted KXIN an additional 180 calendar days, until September 25, 2023, to regain compliance with the minimum bid price requirement according to Nasdaq Rule 5810(c)(3)(A).
KXIN's trailing-12-month ROCE, ROTC, and ROTA of negative 277.85%, 94.10%, and 152.12% compare to the industry averages of 10.04%, 6.10%, and 3.62%. Also, its trailing-12-month cash per share of $0.03 is 98.7% lower than the industry average of $2.41.
In the fiscal year 2022 that ended December 31, 2022, KXIN's total revenues decreased 67.4% year-over-year to $82.84 million, while its gross profit slumped 87.7% from the year-ago value to $646 thousand.
The company's loss from operations and net loss amounted to $47.93 million and $84.62 million in the same period, respectively. During the same period, its total current assets stood at $42.30 million, down 28.2% versus $58.94 million as of December 31, 2021.
KXIN's shares have slumped 50.7% over the past nine months and 68.3% over the past year to close the last trading session at $0.34.
KXIN's POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, which translates to Sell in our proprietary rating system.
It has an F grade for Quality. Out of 28 stocks in the same industry, it is ranked #21. To see KXIN's ratings for Growth, Value, Momentum, Stability, and Sentiment, click here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these "death trap" stocks are lurking in your portfolio:
ABG shares were trading at $227.17 per share on Thursday afternoon, up $0.69 (+0.30%). Year-to-date, ABG has gained 26.73%, versus a 14.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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