By Philip van Doorn
This has been quite a year for many industries, and not only because of sales rebounds after so many businesses were temporarily shut down during the early stages of the coronavirus pandemic.
Unprecedented stimulus payments by the federal government to consumers have helped feed pent-up demand, and with component supply disruptions, the most obvious distortion has been seen on auto-dealer lots.
This is why David Dineen, the chief investment officer for global small-cap at Spouting Rock Asset Management, believes that three large auto-dealer chains are well-positioned for stock-price gains in 2022 and beyond.
“We are coming off trough sales for this economic cycle” for new cars, he said during an interview.
Spouting Rock Asset Management is based in Bryn Mawr, Penn., and has $3.1 billion in assets under management.
The supply shortage has led to a decline in sales of new cars and light trucks to a seasonally adjusted annualized rate (SAAR) of 14.4 million units in October from a SAAR of 18. 8 million in April, according to the Bureau of Economic Analysis.
Dineen described the October SAAR as “a recessionary level,” underscoring an opportunity for investors, because the auto dealers trade at lower valuations than auto manufacturers and parts suppliers.
Bad ‘comps’ for many industries in 2022
When covering financial results, Wall Street analysts and the financial media are fixated on year-over-year comparisons because of seasonality. But those “comps” can paint a confusing picture. For example, an industry whose sales dropped during the early days of the coronavirus pandemic in the first quarter of 2020 might have shown stellar “improvement” a year later, even if its sales hadn’t come close to recovering to pre-pandemic levels.
Artificially high year-over-year increases in sales, profits or cash flow this year may be followed by much slower growth rates as business in various industries gets closer to pre-pandemic norms.
According to Dineen, “you will have difficult comps for much of consumption in 2022.”
And that’s why he thinks large dealers who sell new cars are a good place for investors who wish to make another pandemic rebound play.
Low valuations for auto dealers
The auto dealers as a group have suffered a “re-rating” by investors as the shortage of new cars has caused sales to tumble, while creating upward price pressure and shortages of used cars.
To illustrate how this has affected stock valuations relative to earnings, we looked at the six auto dealers included in the S&P 1500 Composite Index /zigman2/quotes/210600453/delayed XX:SP1500 -1.00% (made up of the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.04% , the S&P 400 Mid Cap Index /zigman2/quotes/219506813/composite MID -0.67% and the S&P Small Cap Index /zigman2/quotes/210599868/delayed SML -0.38% ). Here’s how forward price-to-earnings ratios for the six car dealers have moved since the end of 2019:
The forward P/E ratios are based on rolling 12-month earnings estimates among analysts polled by FactSet. Click on the tickers for more about each company. Click here for Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
The exception to downward P/E movement for these dealers has been CarMax Inc. /zigman2/quotes/204412041/composite KMX -1.42% .