2 Auto Retailers Worth Watching Despite Industry Challenges

Industry Overview - The Zacks Auto Retail and Wholesale industry is experiencing a subdued outlook due to slowing vehicle sales growth, as much of the pent-up demand was absorbed in 2023 [1] - The industry relies on its retail and wholesale network for various tasks, including the sale of new and used vehicles, auto parts, and vehicle financing [2] - The automotive sector is consumer cyclical, heavily influenced by economic conditions and disposable income levels [2] Key Themes - High vehicle financing costs are causing affordability concerns, with the Federal Reserve maintaining a key overnight interest rate at a 23-year high since July 2023, which is expected to remain elevated until inflation stabilizes [3] - Slower-than-expected adoption of electric vehicles (EVs) is hindering sales growth, with high prices and consumer hesitancy affecting market dynamics [4] - Declining vehicle margins are evident, with inventory levels exceeding 2.6 million vehicles and average incentives per vehicle rising 81% from April 2023 to $3,087 [5] Investor-Friendly Moves - Despite broader market concerns, many industry participants are focused on returning value to shareholders through buybacks and dividends, benefiting from acquisitions and store expansions [5] Industry Ranking and Performance - The Zacks Auto Retail & Wholesale industry currently holds a Zacks Industry Rank of 222, placing it in the bottom 11% of around 250 Zacks industries, indicating negative near-term prospects [6][7] - The industry has underperformed the S&P 500, gaining 8.8% over the past year compared to the S&P 500's growth of 26.2% [8] Valuation Metrics - The industry is trading at a trailing 12-month EV/EBITDA ratio of 6.77X, significantly lower than the S&P 500's 14.65X and the sector's 14.49X [9] Company Highlights - Rush Enterprises: A leading provider in the commercial vehicle industry, known for its extensive network of dealerships. The company has shown strong growth in aftermarket demand and has increased its payout seven times in the last five years, with an average annualized growth rate of 30.4% [11][12] - AutoNation: One of the largest automotive retailers in the U.S., with a diversified product mix and a focus on digital solutions. The company has authorized an additional $1 billion in shares for its repurchase program [13][14]