The used car boom in the US has run out of gas. A global chip shortage during the pandemic constrained the supply of new cars and sent demand and prices for used vehicles soaring. But successive interest rate rises and recession fears have put the brakes on Americans’ car-buying mood.
CarMax underscored the depth of the industry’s woes on Thursday. The company, one of the country’s biggest used-car retailer, reported a 86 per cent slump in third-quarter profits. It is cutting costs and halting share buybacks as it buckles up for a bumpy year ahead. The results should be a warning to investors in the wider auto sector.
Part of the problem is that prices for used cars remain sky-high. At CarMax, the average selling price during the third quarter was $28,530. That is little changed from the second quarter, but still about 2 per cent higher than the same period a year ago.
Higher interest rates have meanwhile pushed many buyers out of the market. The average interest rate on used-car loan in the US topped 10 per cent in November, according to research site Edmunds.com.
This means that while CarMax’s average used vehicle gross profits per unit (GPU) held steady during the quarter, it also sold far fewer units — 21 per cent less in fact.
The 56 per cent drop in CarMax’s share price this year reflects the dim outlook for profit growth. The stock now trades on 15 times forward earnings, compared with its three year average of 19 times. But this is hardly priced to move, given that profits are expected to halve this year and rise modestly next year.
A better bet may be auto parts retailer AutoZone. Even though people are balking at buying new cars, they will still need to invest in maintenance and upkeep of existing ones. The average age of cars and light trucks on US roads is a record 12.2 years according to IHS Markit. A recent pullback in its share price now puts AutoZone on 18 times forward earnings, in line with its three year average. Investors should kick the tyres on this stock.
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