Federal Reserve Chairman Jerome Powell repeatedly stated on Aug. 1 that an interest rate cut would be “on the table” for the Fed’s next meeting. This meeting is slated to occur on Sept. 17. Moreover, the futures market is now reflecting an 84% chance of an unusually large reduction. The reduction will be one-half of one percent in the Fed’s benchmark rate. In my view, the latter metric suggests that futures investors are 100% certain that the benchmark will be cut by at least one-quarter of a percentage point. Furthermore, the futures market now reflects a 60% chance of 1.25 percentage points of cuts by the end of 2024.
Since higher rates have played a key role in making vehicles less affordable, a reduction of rates would enable many more Americans to easily buy vehicles. The latter trend, of course, would be extremely positive for auto retailers. For investors who want to profit from this development, here are three auto retail stocks to buy.
Carvana (CVNA)
On July 12, investment bank BTIG started coverage of online auto retailer Carvana a “buy” rating. The bank believes that Carvana’s (NYSE:CNVA) business model of owning all of its assets enables it to benefit from “superior unit economics, a better user experience, and stronger managerial execution.” This is compared with its competitors that do not use a similar approach. Noting that the company has higher margins and generates more than double the EBITDA per vehicle versus its peers, the bank placed a $155 price target on the shares.
Also bullish on Carvana last month was another investment bank, Needham. The bank believes that the company’s emphasis on selling automobiles online will enable it to increase its revenue. It will also be able to increase its market share. Needham raised its rating on the shares to “buy” from “hold.”
Carvana reported that the number of vehicles that it had sold in the second quarter had jumped 33%. This was versus the same period a year earlier. Its revenue had advanced 15% year-over-year to $3.4 billion.
Group 1 Automotive (GPI)
Like Carvana, Group 1’s (NYSE:GPI) top line and unit sales are already growing. Furthermore, the retailer is already generating significant profits. Consequently, I expect the upcoming interest rate cuts may cause Group 1’s growth and profitability to increase. It should then reach very attractive levels.
Last quarter, Group 1’s top line climbed 3% versus the same period a year earlier to $4.7 billion. The latter figure set an all-time sales record for Q2. Even though the software that the firm uses was hit by a cyberattack which effectively lowered its pre-tax earnings per share by $1.31 cents, the company generated EPS from continuing operations of $9.80.
Also noteworthy is that analysts, on average, expect the firm’s EPS to climb to $41.49 next year. This was versus $39 this year. What’s more, Group 1 has a very low forward price-to-earnings ratio of 8.35 times, while the Relative Strength of GPI stock was an elevated 82 as of July 25. The latter figures indicate that the firm has outperformed the vast majority of stocks in the last 12 months.
Given all of these points, I view Group 1 as one of the best auto retail stocks to buy now.
Sonic Automotive (SAH)
Although Sonic’s (NYSE:SAH) revenue dropped 5% last quarter versus the same period a year earlier, there was a great deal to like about the firm’s Q2 results. For example, the same-store used vehicle unit sales of its franchised dealerships advanced 3% YOY. Additionally, their same-store parts, service, and collision repair advanced 2% YOY. Further, the same-store revenues of its EchoPark wholly owned dealerships climbed 10% YOY, while their gross profit soared 81% YOY and they generated record adjusted EBITDA of $7.2 million.
Moreover, like Group 1, Sonic’s financial metrics were negatively impacted last quarter by a cyberattack against software that it uses.
SAH stock has a low forward price-earnings ratio of 9.8 times and a truly tiny price-to-sales ratio of just 0.14 times. Finally, analysts, on average, expect its EPS to surge to $6.24 next year from $5.77 in 2024.
All of these positive attributes make Sonic one of the best auto retail stocks to buy now.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
