The global shortage of semiconductor supply left the auto industry in disarray in 2021. While the demand for vehicles remained high through 2021, thanks to preference for personal mobility and economic recovery, supply chain snarls and subsequent production cut by auto biggies limited the supply of new vehicles. The prices of new cars shot through the roof owing to tight inventory levels, thus keeping a lid on sales volumes.
Amid this scenario, a growing number of consumers migrated toward the used-vehicle market. With the demand for used vehicles likely to remain robust, we recommend you to keep a tab on stocks like CarMax KMX, Carvana CVNA, Sonic Automotive SAH and AutoNation AN. Before delving into the stocks, let’s look at how the used vehicle market fared in 2021 and where is it headed in 2022.
The U.S. used vehicle market was a bright spot in an otherwise struggling auto industry in 2021. Per Cox Automotive, the red-hot U.S. used vehicle market hit an all-time record last year, with sales totaling 40.9 million units, marking year-over-year growth of 10%. Retail sales accounted for around 54% of the total used car sales for 2021, signaling a 13% increase year over year.
Sales of used vehicles held strong despite soaring prices. Wholesale used-vehicle prices have been shooting up over the past several months, bringing the Manheim Used Vehicle Value Index to a record high of 236.2 in December 2021, implying a 46.6% jump year over year.
Higher wholesale prices paid by dealers translated to rising retail prices for consumers. Per Kelly Blue Book, the average used car price in America at November 2021-end was $27,569, up 27% and 41% from the corresponding periods in 2020 and 2019, respectively. Per Edmunds, the average monthly payment for used vehicles is expected to have broken records in fourth-quarter 2021 and rise to $520 from $500 in third-quarter 2021 and $437 in fourth-quarter 2020.
Will the Momentum Persist in 2022?
Cox Automotive estimates the used vehicle market to stay strong in 2022. Especially, the momentum is likely to continue through the first half of this year. Per its preliminary forecast, Cox Automotive envisions U.S. used-vehicle sales to total 39.3 million for 2021, including 22.1 million retail purchases. While the estimate indicates a slight decline from 2021 volumes, it is still higher than 2020 used-car sales of 37.3 million, with retail sales being 19.8 million. The forecast, however, does not take into account any further supply chain disruptions. With uncertainty prevailing with the impact of the Omicron variant on supply chain and inventory, it may take more time for new vehicle sales to pick up pace and the used-vehicle market may continue its upward trajectory.
Basically, sales volumes and prices of used vehicles are not expected to dip much until the chip crunch abates and new vehicle production ramps up. With the chip crisis unlikely to ease until at least mid-2022, new vehicle production is anticipated to remain sluggish. Goldman Sachs forecasts a low inventory of new cars to linger through at least mid-2022. So, it may take a while for used car prices to end their rocket ride. If you want to capitalize on the high prices and strong sales of used vehicles to enjoy handsome profits, we recommend you to keep a close watch on the below-mentioned auto companies that deal in used cars.
4 Stocks to Watch
AutoNation: One of the largest automotive retailers in the United States, AutoNation’s strong footprint, large dealer network, aggressive store expansion efforts along with brand extension strategy and alliances are praiseworthy. The buyout of 11 dealerships from Peacock Automotive Group in 2021 boosted AutoNation’s portfolio and is set to add $380 million to its annual revenues. In November, AN completed the acquisition of Priority 1 Automotive, which would add approximately $420 million in annualized revenues.
Encouragingly, AN targets to sell 1 million combined new and pre-owned vehicles on an annual basis through organic growth, expansion of AutoNation USA and future buyouts. The Zacks Consensus Estimate for 2022 sales and earnings indicates year-over-year growth of 5.5% and 2.1%, respectively. AutoNation currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CarMax: CarMax operates as the largest retailer of used vehicles in the United States. It has shifted gears to concentrate entirely on the used-vehicle business with the divestment of its last new car dealership in October 2021. KMX’s omni-channel offerings to improve customer shopping experience and opening of new stores will fuel its prospects. The acquisition of Edmunds, completed on Jun 1, 2021, further solidifies CarMax’s position in the used auto ecosystem, enhances digital capabilities and bolsters revenue prospects.
CarMax’s long-term target of achieving $33 billion in revenues and selling 2 million units annually through retail and wholesale channels by fiscal 2026 augurs well. The Zacks Consensus Estimate for fiscal 2022 sales and earnings indicates year-over-year growth of 67.3% and 62.2%, respectively. KMX currently carries a Zacks Rank #3 (Hold).
Carvana: Carvana is a leading e-commerce platform for buying and selling used cars. The company’s end-to-end compelling business model has disrupted traditional used-car sales by allowing consumers to shop from the comfort of their homes. With a less expensive and zippy approach to selling cars, Carvana is well positioned to further expand the business in the coming years. As of third quarter-end, the company expanded to 324 markets, which increased its population coverage to more than 80.6% of the U.S. population.
Carvana achieved gross profit per unit (GPU) of $3,252 in 2020, reflecting year-over-year growth of 14%. Encouragingly, it estimates total GPU to be more than $4,000 in 2021. The Zacks Consensus Estimate for 2022 sales and earnings indicates year-over-year growth of 30% and 38.5%, respectively. CVNA currently carries a Zacks Rank #3.
Sonic: Sonic is one of the notable automotive retailers in the United States. The firm’s EchoPark segment, which operates independently from the franchised dealerships business, sells used cars and light trucks. The EchoPark unit is the major growth engine of the firm. The auto retailer aims to retail between 100,000 and 105,000 units in 2021 and expects the EchoPark unit to account for 20-25% of total 2021 revenues, indicating an increase from 15% in 2020. Strong organic growth fueled by EchoPark expansion is likely to significantly boost Sonic’s prospects.
Importantly, Sonic targets 575,000 unit sales and $14 billion in annual EchoPark revenues by 2025, with a nationwide distribution network of more than 140 stores. The Zacks Consensus Estimate for 2022 sales and earnings indicates year-over-year growth of 28% and 18%, respectively. SAH currently carries a Zacks Rank #3.
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