The automotive industry is transforming how vehicles are powered, driven, and shopped for. Moreover, with advanced technology integration, innovative zero-emission vehicles and autonomous self-driving vehicles are expected to be more prevalent in the near term.
The vehicle market’s low inventory amid solid demand is likely to significantly offset the impact of the Fed’s rate hike on the industry’s revenues. Cox Chief Economist Jonathan Smoke agreed that new vehicle sales would likely remain unaffected by the aggressive rate hike cycle.
On the other hand, the supply chain constraints have resulted in price rises for used cars. According to Jenni Newman, editor-in-chief of Cars.com Inc. (CARS), used car prices increased 37% in the first quarter as demand outstripped supply.
Given this backdrop, fundamentally strong auto stocks Group 1 Automotive, Inc. (GPI), AutoNation, Inc. (AN), and Penske Automotive Group, Inc. (PAG) might be solid investments now. Wall Street analysts see significant upside potential in these stocks in the near term.
Group 1 Automotive, Inc. (GPI)
GPI operates as an automotive retailer. The company sells new and used cars, light trucks, vehicle parts, insurance contracts, vehicle financing, and automotive maintenance and repair services.
In May, GPI announced an increase in its common stock repurchase authorization to $250 million. The company also declared an increase in the quarterly dividend to $0.37 per share for the first quarter of 2022, which was payable to shareholders on June 15. This reflects upon the company’s shareholder return and cash generation ability.
In April, the company announced the acquisition of Larry H. Miller Toyota in Albuquerque, New Mexico. The dealership, which was to be renamed Sandia Toyota, is expected to expand GPI’s New Mexico portfolio and generate $115 million in annual revenues.
GPI’s revenue increased 30.1% year-over-year to $3.84 billion in the first quarter ended March 31. Its income from operations grew 89.1% from the year-ago value to $285 million, while its net income improved 99.1% year-over-year to $202.90 million over the period. The company’s EPS increased 115.2% from its year-ago value to $11.88.
The consensus EPS estimate of $10.70 for the fiscal second quarter (ending June 2022) indicates a 3.8% improvement year-over-year. The consensus revenue estimate of $4.14 billion for the same quarter reflects a 12% increase from the same period last year. The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
The stock has gained 15.5% over the past year and 4.5% intraday to close its last trading session at $166.39. The 12-month median price target of $185.00 indicates an 11.1% potential upside. The price targets range from a low of $160.00 to a high of $210.00.
GPI’s POWR Ratings reflect this promising outlook. The company has an overall A rating, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
GPI is rated an A in Value and B in Growth and Quality. Within the B-rated Auto Dealers & Rentals industry, it is ranked #5 of 25 stocks. To see additional POWR Ratings for Momentum, Stability, and Sentiment for GPI, click here.AutoNation, Inc. (AN)
AN is an automotive retailer operating through the three segments of Domestic; Import; and Premium Luxury. The company provides a range of automotive products and services and automotive finance and insurance products.
In May, AN announced that 129 AutoNation stores had been certified in the J.D. Power 2022 Dealer of Excellence Program for their exceptional customer service. “This certification sets us apart, especially coming from such an authority as J.D. Power,” said Marc Cannon, Executive Vice President, and Chief Customer Experience Officer.
In the first quarter ended March 31, AN’s total revenue increased 14.4% year-over-year to $6.75 billion. Its operating income grew 54.1% year-over-year to $519 million, while its adjusted net income rose to $362.10 million, representing an increase of 54.9% year-over-year. The company’s adjusted EPS increased 107.2% from the prior-year period to $5.78.
Analysts expect AN’s revenue for the quarter ending June 2022 to be $7.02 billion, indicating 0.6% year-over-year growth. The company’s EPS for the same quarter is expected to increase 26.7% from the prior-year quarter to $6.12.
AN has gained 24.6% over the past year and 5.6% intraday to close its last trading session at $110.64. The 12-month median price target of $142.00 indicates a 28.3% potential upside. The price targets range from a low of $107.00 to a high of $160.00.
It is no surprise that AN has an overall A rating, which translates to Strong Buy in our POWR Ratings system. It has an A grade for Value and a B for Growth and Quality. In the Auto Dealers & Rentals industry, it is ranked #3.
Beyond what we’ve stated above, we have also given AN grades for Momentum, Stability, and Sentiment. Get all AN ratings here.
Penske Automotive Group, Inc. (PAG)
PAG is a diversified transportation services company. It operates through four segments: Retail Automotive; Retail Commercial Truck; Other; and Non-Automotive Investments. The company sells new and used vehicles and related products.
In May, PAG announced that it had acquired Terry Lee Hyundai and Genesis of Noblesville, Indiana. The acquisition is expected to generate annualized revenue of $80 million and bolster the company’s presence in the Indianapolis metropolitan market. A month prior, PAG announced the acquisition of BMW/MINI of Escondido, along with a collision center located in Escondido, California, which is expected to generate an annualized revenue of approximately $115 million.
For the first quarter ended March 31, PAG’s revenue increased 20.8% year-over-year to $6.98 billion. Its operating income rose 83.1% from the year-ago value to $402 million. The company’s net income increased 101.8% year-over-year to $369.50 million, while its income per share grew 110.6% from the prior-year quarter to $4.76.
Street EPS estimate for the fiscal year 2022 of $17.35 reflects a rise of 13.6% year-over-year. Likewise, Street revenue estimate for fiscal 2022 of $28.17 billion indicates an improvement of 10.2% from the prior year. Additionally, PAG has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.
Over the past year, PAG’s stock has gained 46.1% and 3.5% intraday to close its last trading session at $106.06. The 12-month median price target of $125.00 indicates a 17.8% potential upside.
PAG’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to Strong Buy in our POWR Ratings system.
PAG has a B grade for Growth and Value. In the Auto Dealers & Rentals industry, it is ranked #2. Click here for the additional POWR Ratings for PAG (Momentum, Stability, Sentiment, and Quality).
GPI shares were trading at $165.76 per share on Tuesday afternoon, down $0.63 (-0.38%). Year-to-date, GPI has declined -14.75%, versus a -20.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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