Used Car Prices Hit a Record During a Pandemic. Here’s Why. – Barron's

It’s a stunning knowledge level. “What planet am I on?” is one quizzical response J.P. Morgan analyst Ryan Brinkman obtained from a shopper upon listening to the information.

“We didn’t name it, nor did we anticipate it,” wrote Brinkman in a Friday analysis report. “However quite a few knowledge factors all counsel the U.S. auto trade is within the midst of a as soon as fabled however clearly not legendary V-shaped restoration.”

V-shaped refers to issues snapping again quickly after a pointy decline. It’s the best-case state of affairs for all buyers nonetheless working by way of precisely how Covid-19 is affecting the U.S. economic system—and their portfolios—over the brief and long run.

New automobile gross sales are coming again strongly, too. After dropping from an annualized price of about 16.eight million models in February to eight.6 million in April, gross sales hit 12.2 million models in Might. Brinkman thinks annualized gross sales may high 14 million models in June, based mostly on current feedback from auto dealership teams corresponding to
Sonic Automotive
(ticker: SAH). That will be a 67% soar from April lows.

Nonetheless, 14-plus million isn’t a document. So what offers with used automobile pricing? “Stock ranges moved decrease,” Benchmark analyst Mike Ward tells Barron’s. Fewer used automobiles have been in the marketplace in response to decrease demand. A mixture of fewer trade-ins and fewer shopping for at auctions from used automobile sellers, adopted by a rebound in client demand, was the recipe for the document.

Ward wrote in a current analysis report that same-store gross sales at
CarMax
(KMX) have been down solely 10% within the first couple of weeks of June, and a number of other retailers even have constructive comparable gross sales 12 months over 12 months. The corporate reported a same-store sale drop of 42% 12 months over 12 months for its quarter ended Might.

Used automobile costs are extremely vital for all the automotive worth chain. For starters, the used automobile market is bigger than the brand new automobile market. Extra used vehicles change palms every year than new vehicles are bought. And the extent of used automobile costs impacts what new vehicles can promote for, in addition to what suppliers of aftermarket components and companies can cost.

For auto shares, Brinkman prefers
Normal Motors
(GM) inventory to
Ford Motor
(F) as a result of GM has extra publicity to North America, comparatively talking. GM bought its European operations years in the past. He charges shares the equal of Purchase and has a $33 worth goal for the inventory. Brinkman charges Ford shares Maintain with a $7 worth goal.

He additionally says shares of a number of half suppliers are a purchase, together with
BorgWarner
(BWA),
Magna
(MGA), Aptiv (APTV),
Dana
(DAN), and
American Axle & Manufacturing
(AXL). He charges aftermarket automotive firms
LKQ
(LQA) and
KAR Public sale Providers
(KAR) Purchase as properly.

The 5 components suppliers are down 25% 12 months so far on common, worse than comparable declines of the
S&P 500
and
Dow Jones Industrial Common.
The group trades for about 12 instances estimated 2021 earnings, however the variation amongst them is huge.

Ward, for his half, additionally covers seller shares. He charges shares of
Lithia Motors
(LAD), Sonic and
Group 1 Automotive
(GPI) Purchase. That trio is down about 11% 12 months so far on common and trades for about 10 instances estimated subsequent 12 months’s earnings.

There nonetheless appears to be loads of alternative within the automotive worth chain because the sector recovers.

Write to Al Root at allen.root@dowjones.com