A global semiconductor chip shortage continues to pose supply challenges for new cars, which is driving up the prices of the used cars. According to the Bureau of Labor Statistics, used car and truck prices have increased 45.2% over the last 12 months, while car and truck rental costs have skyrocketed 87.7%.

With the resurgence of COVID-19 cases due to the rapid spread of its Delta variant, people are expected to continue using private cars rather than public transport, driving up the demand for used cars. Furthermore, with an increase in car-related services on digital platforms, the automotive retail industry could continue to gain significantly in the coming months.

Given this backdrop, we think it could be wise to bet on automotive retailer stocks KAR Auction Services, Inc. (KAR) and Cars.com Inc. (CARS). Wall Street analysts expect these two stocks to rally more by than 35% in the near term.

KAR Auction Services, Inc. (KAR)

Together with its subsidiaries, Carmel, Ind.-based KAR provides used vehicle auctions and related vehicle remarketing services to the automotive industry. The company operates through ADESA, Inc. (ADESA) and Automotive Finance Corporation (AFC). Its integrated digital marketplaces and vehicle logistics centers help reduce risk, improve transparency and streamline the customers’ experience  in roughly 75 countries.

ADESA announced the launch of its proprietary “% to Retail” functionality on May 25, which uses KAR’s data science capabilities to evaluate data and accurately estimate potential vehicle profitability. The new feature is expected to help dealers quickly analyze vehicle pricing and make better-informed decisions on the best inventory for their lots.

KAR’s total operating revenue increased 39.7% year-over-year to $585.40 million for the second quarter, ended June 30, 2021, driven by solid revenue growth across all its segments. The company’s operating profit came in at $66.60 million versus  a $4.70 million loss in the prior-year quarter. Its operating adjusted net income came in at $23.60 million, up 140.8% year-over-year, while its adjusted operating EPS was  $0.15, representing an 87.5% year-over-year rise.

The company’s revenue and EPS are expected to increase 9.6% and 105.9%, respectively, year-over-year to $2.40 billion and $1.05 in its fiscal year 2021. KAR has gained 25.2% over the past three months to close yesterday’s trading session at $18.17.

Wall Street analysts expect the stock to hit $25.33 in the near term, which indicates a potential 39.4% upside. Also, all three analysts that have rated KAR rated it Buy.

Cars.com Inc. (CARS)

CARS in Chicago is one of the leading digital marketplace and solutions providers that is revolutionizing automotive retail. The company sells online subscription advertising products that target car dealerships and offers a suite of products and services targeting the automotive needs of its buyer and seller customers.

On June 28, CARS announced a transformed online platform and mobile app for its 26 million monthly unique users. The new site’s load times are  up to 87% faster and real-time inventory updates of more than 50,000 cars are added to the site daily. In addition, the platform is built on cloud-based technology and is expected to attract more users, offering a more personalized and contextually relevant car shopping and selling experience.

CARs  is expected to release its second-quarter earnings results today. CARS’ total revenue increased 3.5% year-over-year to $153.30 million for the first quarter, ended March 31, 2021. The company’s monthly average revenue per dealer (ARDP) came in at $2,268, up 8% year-over-year. Its net income came in at $5.28 million compared to a $787.43 million loss  in the prior year period. Its EPS for the quarter came in at $0.08 compared to an $11.76 loss in the year-ago period.

Analysts expect CARS’ revenue and EPS to increase 13.4% and 64.7%, respectively, year-over-year to $620.68 million and $1.68 in its fiscal 2021. Over the past nine months, the stock has soared 42.9% to close yesterday’s trading session at $11.75.

Wall Street analysts expect the stock to hit $20.33 in the near term, which indicates a potential 73% upside. Also, all three analysts that have rated CARS rated it Buy.

KAR shares were unchanged in premarket trading Thursday. Year-to-date, KAR has declined -2.36%, versus a 18.46% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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