By Angela Palumbo
AutoNation stock is worth buying because the new-car environment looks strong, while CarMax shares are at risk given continuing problems in the market for used vehicles, according BofA Securities.
Analyst John Murphy rates AutoNation as a Buy with a $210 price target. He wrote in a research note that while he is still positive about franchised car dealers in general, AutoNation remains his "top pick," in the group.
"AutoNation should benefit from an improving new vehicle sales cycle driven by pent up demand and continue to produce strong cash flow that is re-deployed towards accretive share buybacks," Murphy wrote.
Prices for new vehicles have been declining in recent months. According to Kelly Blue Book data published on Tuesday, prices of new vehicles were lower than a year earlier in May, for their eighth consecutive decline. Dealers faced with higher inventories are settling for less.
AutoNation Chief Executive Michael Manley said on the company's first-quarter earnings call in April that "consumer demand for vehicles in the first quarter was robust." AutoNation also reported that new-vehicle revenue increased 2% year over year in the quarter to $3 billion, while the figure for used cars and trucks dropped 2% to $2 billion.
In a time of high interest rates and inflation, car shoppers want the best bang for their buck. A drop in prices gives consumers an incentive to choose a new vehicle over a used car. That puts CarMax, which is more dependent on the used-car market, in a risky spot.
"Our recent channel checks indicate that the sourcing environment for used cars is still challenging, especially for late model used vehicles. We expect this dynamic to persist through 2025+ which should hinder KMX same-store unit growth," Murphy wrote.
CarMax didn't immediately respond to a request for comment.
Low lease volumes in recent years are a part of the problem. According to J.P. Morgan, about 3 million cars were leased in 2021 and 2022, down from 5.9 million in 2019 and 2020. Leased cars hit the used market after about three years, so that decline early in the decade has reduced the amount of cars that could be available in 2024 and 2025 by 2.9 million units. That's significant.
"Intense competition from franchised dealers and Carvana compound this issue." Murphy wrote. He rates CarMax as Underperform with a $50 price target.
Write to Angela Palumbo at angela.palumbo@dowjones.com
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June 13, 2024 12:27 ET (16:27 GMT)
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