4 Auto Retail Stocks to Buy as Digitization and M&A Fuel Growth

Core Insights - New vehicle sales remained strong in Q3 2025, driven by electric vehicle (EV) sales, but affordability issues and the expiration of EV tax credits may impact future demand [1][4] - The Federal Reserve's rate cuts are expected to gradually lower auto financing costs, providing relief to buyers and retailers [1][5] - Leading players are leveraging digitization, strategic acquisitions, cost management, and shareholder-friendly actions to maintain competitiveness [1][6][7][8] Industry Overview - The auto retail and wholesale industry is crucial for delivering vehicles and parts to consumers, operating through dealership networks and retail chains [3] - Economic conditions significantly influence the industry's performance, with consumer spending on vehicles typically increasing during economic upturns and declining during downturns [3] - The COVID-19 pandemic accelerated the industry's shift towards online tools and e-commerce, a trend expected to continue [3] Key Themes - Vehicle sales are anticipated to soften as EV demand cools and affordability issues persist, with average vehicle prices exceeding $50,000 [4][5] - The Federal Reserve's interest rate cuts may help lower auto loan costs, potentially bringing buyers back into the market [5] - Auto retailers are pursuing strategic acquisitions to expand their market reach and improve operational efficiency [6] Digitization and Customer Experience - Dealers are investing in digital platforms to enhance the buying experience, which is crucial for maintaining competitiveness in a tech-savvy market [7] - The shift towards digitization is expected to broaden customer reach and improve margins [7] Investor-Friendly Actions - Several auto retailers are committed to rewarding shareholders through buybacks and dividend increases, supported by healthy cash flow from acquisitions and cost-efficiency programs [8] Industry Performance - The Zacks Auto Retail & Wholesale industry ranks 18, placing it in the top 7% of around 245 Zacks industries, indicating positive near-term prospects [9][10] - The industry has underperformed the S&P 500 and the broader Auto, Tires, and Truck sector over the past year, returning 8.2% compared to the S&P 500's 14.7% and the sector's 40.8% [12] Valuation Metrics - The industry is currently trading at an EV/EBITDA ratio of 8.5X, significantly lower than the S&P 500's 18.12X and the sector's 22.41X [15] - Historical trading ranges for the industry have been between 4.78X and 10.79X over the past five years [16] Company Highlights - Asbury Automotive is expanding rapidly through acquisitions and digital innovation, with a projected annualized sales increase of around $3 billion from recent deals [19][20] - Sonic Automotive's balanced business model supports steady profitability, with significant growth expected from its EchoPark used car segment [23][24] - Penske Automotive is expanding its global footprint and maintaining a strong balance sheet, with a low debt-to-capital ratio of 14% [27][28][29] - AutoNation is enhancing its digital capabilities and expanding through acquisitions, with a focus on strengthening its market presence [32][33]