Benefit from Used Car Sales with These Stocks

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May 30, 2014

While sales of new vehicles in the U.S are expected to touch 16 million by the end of calendar year 2014, the market for used cars have also picked up as benefits such as lower depreciation, reduced insurance cost, and registration fees are driving its growth of late. Also, the used car helps in saving a lot of money that could well be used elsewhere. These derived benefits are few but large consideration for the used cars that is undoubtedly throwing tough competition to new vehicles in U.S.

Nevertheless both operate in different market segment and have entirely different market. But the used car also comes with a lot of features and technology that could enrich user experience as these benefits are quite substantial. Therefore, it has become attractive investment avenue recently and dealers like CarMax (KMX, Financial), Lithia Motors (LAD, Financial), America's Car-Mart (CRMT, Financial) and Group 1 Automobile (GPI), could provide handsome return as these companies are driving used cars market significantly. Let’s have a look at their performance one by one.

CarMax

CarMax has the market capitalization of $11 billion and one of the biggest companies in the used car industry in the U.S. CarMax offers buyers a great flexibility on selecting models they have online and check out cars at their convenience that enhances user buying experiences. It also help the customers to trade-in their old cars that makes it more impressive and solid.

Also, the company reported impressive results in the recently reported quarter as it revenue increased 19% to $3.31 billion from a year ago period, with units sales rising approximately 22% and used car sales zoomed to 17% year-on-year basis. CarMax achieved this stunning growth due to tremendous execution on its parts that helped the company to increase its sales counts.

In addition, CarMax has diversified its business quite a lot as it opened three new superstores in the first quarter. Besides it also practices share repurchase and dividend distribution program as it repurchased nearly $463.5 million shares in the last quarter.

Lithia Motors

Lithia Motors, on the other hand, was the biggest performer of the year in terms of price appreciation of the stock. Also recent acquisitions such as Bitterroot Toyota in Missoula, Montana, have led its sales increased 23% for in the reported quarter. The company sells both used and new cars and primarily covers the western and Midwestern part of the U.S.

Lithia registered highest quarterly income in its history in the last reported quarter as it net profit increased remarkably 42% from the year ago period as revenue from continuous operation grew $1.00 billion, increase of $186.2 million from $822.3 million, in the same quarter last year.

Lithia’s new vehicles same store sales witnessed, an increase of 19% and used vehicle retail same store sales also increased by 19%. As a result it exceeded the $1.00 billion in quarterly revenue benchmark for the first time in its history. The company also increased its full-year outlook which will generate plenty of interest for investors to pick the stock.

In addition, Lithia expects its new vehicle same-store sales to increase 17% this year while used vehicle sales are expected to increase by 16.5% for the year.

At a trailing P/E of 20, Lithia is cheaper than CarMax which trades at a P/E of almost 26x. In addition, Lithia’s five-year PEG ratio is just 0.73, which means that the company is expected to grow at a decent pace.

America's Car-Mart

America’s Car Mart is another used car dealer where people can go and buy used vehicles. The company also facilitates financing facility therefore generates substantial profits. America’s Car Mart currently trades at a P/E of just 13.6, which is quite cheap as compared to others covered here.

The company also reported very impressive results as its revenue increased 11.4% to $123 million as it experienced solid performance of its same-store sales, which was up by 5.6%. Another interesting that capture most of ours attention is that it also witnessed significant 9% rise in retail unit sales along with a 2.6% increase in average retail sales price.

Moreover Car-Mart is aggressively expanding its dealerships as it recently opened 128th dealership in Meridian, Mississippi that should help the company to increase its sales in the upcoming quarters.

Also, the company is determined to open various new dealerships going forward. The analysts expect the company to grow its earnings at a decent clip of 10% per annum for the next five years. The earnings growth rate is in line with the sector’s expected growth rate and given the company’s low trailing P/E multiple, it looks like a good stock to hold in the long run.

Group 1 Automotive

Investors do have another option in the form of Group 1 Automotive that sells new and used cars, light trucks and vehicle parts. It also offer vehicle financing services, service and insurance contract services, and automotive maintenance and repair services , thus has become very popular of late.

Group 1 Automotive has also delivered very impressive results as its revenue increased 23% from the year ago quarter on the back of solid growth of 27.3% in the new vehicles sales. Also it registered 17.2% in used vehicle retail segment.

These are pretty solid growth rates and that’s why the stock looks like a good proposition at a trailing P/E of 19x. Besides Group 1 Automotive has been on an acquisition spree and acquired a dealership with estimated annual revenue of around $80 million in the previous quarter.

In addition, the analysts are anticipating solid growth in its earnings at a CAGR of approximately 18% for the next five years. Also its PEG ratio well within one stands at 0.85 and forward P/E is 13.5 well above its trailing P/E. All-in-All it suggest that the company has enough room to grow in the coming years and investors should take a look at this company as well.

Conclusion

Investing in these companies is comparatively cheaper than that of big new car and vehicles operators like Ford, Toyota, and GM, while you end up saving a lot of money from these used car dealers. Also the used car market has a lot of potential and will certainly enhance your profits in the coming years.