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Used-Car Prices Are Rising. It’s Good News for Lots of Companies. - Barron's

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Used-car prices are rising again—a setback for people seeking to buy, but a welcome sign for holders of automotive stocks.

The used-car market, after all, is larger than the new-car market. Prices there affect, well, everything. Automotive-related stocks have risen since April as pricing has improved, but they aren’t close to recent highs.

The car market is huge, employing millions and generating trillions of dollars in manufacturing, retail, service, and financing. Preowned vehicles are an important part of the value chain. Used-car pricing can affect, for instance, what new cars—and car parts—can sell for, as well as how long used cars will stay on the road. Lower used-car prices, of course, also reduce trade-in values for shoppers seeking a new ride.

Roughly 40 million used cars were sold in the U.S. in 2019. About 17 million new cars were sold.

Used-car pricing hit a multiyear trough in April, falling about 9% year over year. New-car sales plummeted as well, falling almost 50% year over year in the same month. But used-car pricing hit a new high in June and another in July.

Car sales have also bounced off the bottom.

“The trends in the used vehicle market benefit the used vehicle retailers the most...and all the public new vehicle dealers have been expanding used vehicle exposure,” wrote Benchmark analyst Mike Ward in a Monday research report. That includes online used-car sellers Carvana (ticker: CVNA) as well as Vroom (VRM).

Rising used-car values are “a positive sign for auto makers because of the read-across to new vehicle prices and because of implications for lower than previously projected residual value losses in the lease books of their captive finance subsidiaries.,” added J.P. Morgan analyst Ryan Brinkman in his own Monday report.

Car-related stocks have been on fire as pricing has improved following the April lows in used-car prices. Stocks of auto dealers, including AutoNation (AN) and CarMax (KMX), are up 78% on average. Aftermarket stocks including O’Reilly Automotive (ORLY) and LKQ (LKQ) are up about 24%. Auto-finance stocks are up about 22% and automotive parts suppliers’ stocks, such as Aptiv (APTV), are up more than 40% on average.

The Dow Jones Industrial Average and S&P 500, for comparison, are up about 14% and 15%, respectively, over the same span.

Auto makers’ stocks, including General Motors (GM), are up about 26% on average. Tesla (TSLA) is excluded from the calculation; its gain of 105% over the same span would skew the number for gasoline-powered cars.

Despite those gains, the entire automotive universe—excluding Tesla—is down about 12% year to date, on average. About 80% of stocks in the automotive value chain are down year to date. Dealers and parts retailers’ stocks have fared the best. Stocks of auto finance companies, such as Ally Financial (ALLY) and Capital One Financial (COF), and shares of traditional auto makers, have fared the worse.

The trend toward rising prices, along with developments in the fight to control the coronavirus and repair the economy, are all critical for getting the stocks back to the break-even line in terms of year-to-date performance.

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

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Used-Car Prices Are Rising. It’s Good News for Lots of Companies. - Barron's
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