The ongoing global semiconductor chip shortage has significantly impacted the auto industry. Auto manufacturers have had to cut their production targets in the wake of rising chip prices, which, in turn, has caused car prices to surge. This production shortage has led to record high prices due to overwhelming consumer demand. According to Tyson Jominy, head of data and analytics for J.D. Power, around 89% of shoppers are paying more than sticker price or within 5% of it. Bottled-up demand amid logistic disruptions is thus predicted to keep prices high and drive growth in the auto dealership segment.

In fact, used car prices have been appreciating faster than the stock market and certain cryptocurrencies, according to market researcher Jim Bianco.

Given this backdrop, it is wise to bet on quality yet cheap auto dealership stocks Penske Automotive Group, Inc. (PAG), AutoNation, Inc. (AN), and Group 1 Automotive, Inc. (GPI). In addition to having an overall Strong Buy or Buy rating in our proprietary POWR Ratings system, these three stocks have an A grade for Value.

Penske Automotive Group, Inc. (PAG)

PAG, a diversified transportation services company, operates automotive and commercial truck dealerships. The company operates through four segments: Retail Automotive; Retail Commercial Truck; Other and Non-Automotive Investments.

On November 16, 2021, PAG announced that it had acquired McCoy Freightliner (“McCoy”), a medium and heavy-duty commercial trucks retailer located in Oregon. Richard Shearing said, “We are thrilled to welcome McCoy Freightliner to Premier Truck Group. McCoy expands our reach to the Pacific Northwest, servicing the Interstate 5 and 84 corridors, and is within 600 miles of our existing Idaho locations, providing us with the opportunity to improve customer service while further scaling our operations.” 

PAG’s revenue increased 8.8% year-over-year to $6.5 billion for the third quarter ended September 30, 2021. Its net income came in at $356.3 million, up 43.9% year-over-year. Also, its gross profit came in at $1.17 billion, up 21.9% year-over-year.

The stock’s forward EV/S and P/S of 0.55x and 0.32x are lower than the industry averages of 1.36x and 1.13x, respectively.

Analysts expect PAG’s revenue to be $27.15 billion in fiscal 2022, representing a 6.3% year-over-year rise. The company’s EPS is expected to increase 20.9% per annum for the next five years. It has surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 60.6% to close yesterday’s trading session at $103.46.

PAG has an overall A rating, which indicates a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. PAG has an A grade for Value and a B grade for Quality. Within the B-Rated Auto Dealers & Rentals industry, it is ranked #3 of 26 stocks. Click here to see the additional POWR Ratings for Growth, Momentum, Stability, and Sentiment for PAG.

AutoNation, Inc. (AN)

Automotive retailer AN operates through three segments: Domestic; Import; and Premium Luxury. Being America’s largest retailer, the company owns and operates over 300 locations from coast to coast.

On November 16, 2021, AN announced the opening of AutoNation USA Phoenix Avondale, its second pre-owned vehicle store in the Phoenix market, and the fourth new AutoNation USA store to open in 2021. Steve Kwak, AN USA President, said, “The opening of our ninth AutoNation USA store and our plan to have 130 stores open by the end of 2026 underscores our nationwide commitment to the pre-owned vehicle market.”

AN’s used vehicle revenue increased 53.2% year-over-year to $2.32 billion for the fiscal third quarter ended September 30, 2021. The company’s gross profit came in at $1.27 billion, up 30.9% year-over-year. Also, its EPS came in at $5.12, up 149.8% year-over-year.

The stock’s forward EV/S and P/S of 0.44x and 0.28x are also lower than the industry averages of 1.36x and 1.13x, respectively.

Analysts expect AN’s revenue to increase 6% year-over-year to $27.28 billion in fiscal 2022. Its EPS is also estimated to grow 2.3% year-over-year to $17.88 in fiscal 2022. It surpassed the EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 47.7% to close yesterday’s trading session at $109.52.

AN’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which indicates a Buy in our proprietary rating system. AN has an A grade for Growth and Value and a B grade for Quality. Within the same industry, it is ranked #6. Click here to see the additional POWR Ratings for Momentum, Stability, and Sentiment for AN. 

Group 1 Automotive, Inc. (GPI)

GPI, through its subsidiaries, operates in the automotive retail industry.  It operates primarily in the metropolitan areas across 15 states in the United States, 33 towns in the United Kingdom, and three states in Brazil. 

On October 28, 2021, Earl J. Hesterberg, GPI’s President & CEO, said, “We continue to sell most new vehicles almost immediately upon manufacturer delivery.  Assuming no material change in consumer demand, this dynamic should continue throughout the fourth quarter and into 2022.  In addition to the recently announced dealership acquisition in the Dallas and Sacramento markets, we remain on track to close the purchase of the Prime Auto Group in November.”

For the fiscal third quarter ended September 30, 2021, GPI’s used vehicle retail sales increased 43.9% year-over-year to $1.25 billion. Its total revenues came in at $3.51 billion, up 15.4% year-over-year, while its net income came in at $172.1 million, up 36.2% year-over-year. Also, its EPS increased 36.6% year-over-year to $9.33.

The stock’s forward EV/S and P/S of 0.35x and 0.23x are lower than the industry averages of 1.36x and 1.13x, respectively.

GPI’s revenue is expected to be $16.38 billion in fiscal 2022, representing a 19.5% year-over-year rise. The company’s EPS is expected to increase 11.4% per annum for the next five years. In addition, it surpassed Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 20.2% to close yesterday’s trading session at $182.57.

It’s no surprise that GPI has an overall B rating, which equates to a Buy in our proprietary rating system. In addition, it has an A grade for Value and a B grade for Growth and Quality. GPI is ranked #4 in the same industry. Click here to see the additional POWR Ratings for GPI (Momentum, Stability, and Sentiment).

PAG shares were trading at $101.94 per share on Wednesday afternoon, down $1.52 (-1.47%). Year-to-date, PAG has declined -4.92%, versus a -4.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Riddhima Chakraborty

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries. More...

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