A significant theme that has rocked multiple industries over the past year is the massive global chip shortage. One industry that has been particularly hit is the automotive industry. This has led to fewer new cars being produced and has also been a boon to used car dealers and parts suppliers. While the chip shortage was initially expected to be over sooner rather than later, we now know that’s further from the case.
Automotive News reported last week that a new forecast from IHS Markit predicted that the auto industry will not recover until the first half of 2023. This means there could be another year of inventory shortages and higher prices. While investors may want to avoid large automotive manufacturers, used cars, parts, and services will still be high in demand.
If we want to generate higher returns, though, we should focus on very cheap stocks. When I say very cheap, I am looking for a forward P/E below 10. I took a look at auto stocks in our POWR Ratings system with an overall rating of Buy or higher and a Value Grade of A or B. I found three stocks that certainly fit the bill: Winnebago Industries, Inc. (WGO), AutoNation, Inc. (AN), Sonic Automotive, Inc. (SAH).
Winnebago Industries, Inc. (WGO)
WGO manufactures Class A, B, and C motorhomes and towables, customized specialty vehicles, plus parts and services. The company expanded into towables in 2011 with the acquisition of SunnyBrook and then purchased Grand Design in 2016. Towables now make up 82% of the firm’s RV unit volume. WGO expanded into boating in 2018 with the purchase of Chris-Craft and then Newmar in 2019.
The company has a large RV backlog that reflects the massive demand for RVs over the past year and a half. This was initially started during the pandemic as families chose to travel by RV instead of flying. The company’s record backlog of new orders in all segments bodes well for growth throughout the rest of the year.
While this demand may slow some, that isn’t likely to happen until at least 2022. Plus, WGO’s continued cost-cutting efforts should also help its bottom line. A stronger balance sheet and increasing free cash flow will enhance shareholder value. While buyers of traditional vehicles have started to pull back due to higher prices, higher RV prices have not affected RV retail demand.
WGO has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. The company has a Growth Grade of B, which makes sense as earnings are expected to rise 208.5% for the year. WGO also has a Value Grade of B as its forward P/E is only 9.76, and its price-to-tangible book ratio is only 9.1, well below the industry average.
We also provide Momentum, Stability, Sentiment, and Quality Grades for WGO, which you can find here. WGO is ranked #14 in the Auto & Vehicle Manufacturers industry. For more top stocks in this industry, click here.
AutoNation, Inc. (AN)
AN is the largest automotive dealer in the United States, with 230 dealerships and over 300 locations. The company has six AutoNation USA used-vehicle stores, four auction sites, and 74 collision centers across 16 states. These are primarily located in Sunbelt metropolitan areas. AN also sells used vehicles, parts, repair services, and auto financing.
The company’s extensive dealer network, store expansion efforts, and strong footprint should drive profitability. Its focus on cost discipline is also expected to aid margins. Plus, the launch of its digital platform, AutoNation Express, should also boost profitability. This service makes shopping at its stores more attractive than shopping at other dealers.
The company’s impending buyout of 11 stores and a collision center from Peacock Automotive Group will increase AN’s portfolio and add $380 million in annual revenues. The high price for used cars should certainly benefit AN, so there is massive upside potential for its USA stand-alone used-vehicle stores. The company plans to open at least 95 more by 2030.
AN has an overall grade of A and a Strong Buy rating in our POWR Ratings system. The company has a Value Grade of A, which isn’t surprising with a forward P/E of 9.53. Its price-to-free cash flow of 9.5 is also well below the industry average of 25.2. AN also has a Growth Grade of B, as sales are expected to soar 118% for the year.
To access AN’s other grades (Momentum, Stability, Sentiment, and Quality), click here. An is ranked #2 in the Auto Dealers & Rentals industry. For more top stocks in this highly rated industry, click here.
Sonic Automotive, Inc. (SAH)
SAH is the sixth-largest public auto dealership group in the United States by new-vehicle unit sales. It has launched 87 franchised stores in 12 states, primarily in California, Texas, and the Southeast, plus about 25 EchoPark used-vehicle stores. The company derives revenue from parts and collision repair, finance, insurance, and wholesale auctions.
Luxury and import dealerships make up about 88% of new vehicle revenue, while Honda (HMC), BMW (BMWYY), Mercedes, and Toyota (TM) make up about 60% of new vehicle revenue. Like AN’s stand-alone used-vehicle stores, SAH’s EchoPark unit is a significant growth driver for the company. The company aims to sell between 100,000 to 105,000 units this year, with EchoPark expected to represent about 25% of total revenue.
The company is also optimizing its Franchised Dealership business through organic growth and strategic acquisitions. For instance, its impending buyout of RFJ Auto Partners should add $3.2 billion to the company’s annual revenues. Plus, its focus on increasing its digital capabilities should also bolster its growth potential.
SAH has an overall grade of B, translating into a Buy rating in our POWR Ratings system. The company has a Growth Grade of B as earnings are expected to surge 53.5% year over year in the third quarter and 99.7% for the year. SAH also has a Value Grade of A, as its forward P/E is only 5.95, and its price-to-tangible-book ratio of 3.3 is well below the industry average of 21.3.
To access all SAH’s grades (Momentum, Stability, Sentiment, and Quality), click here. SAH is ranked #7 in the Auto Dealers & Rentals industry.
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This article was written by David Cohne, Chief Value Strategist for StockNews.com. David has helped investors find the most profitable stocks for over 20 years.
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WGO shares were trading at $70.99 per share on Tuesday morning, down $1.38 (-1.91%). Year-to-date, WGO has gained 19.37%, versus a 21.44% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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