Price Wars in the Automotive Space
Every consumer in the market today has numerous options when it comes to cars. With the rise of electric and hybrid vehicles, this variety has only grown exponentially, resulting in many automotive sector players feeling the need to compete with each other on pricing alongside other things. Price competition has always been an indicator of a healthy market environment, as it offers the everyday consumer the ability to make an informed decision about the product that they want to buy, so this may not necessarily be a bad development. However, considering the fact that the automotive sector has been facing headwinds in the form of lower demand, particularly in light of higher inflation over the past couple of years, this additional burden of having to compete on pricing to attract more customers can result in many automotive providers facing losses.
According to Bill Russo, the founder and CEO of Automobility Limited, the price wars have penetrated the EV space with great zeal, particularly because EVs are among the priciest vehicles in the market today. Russo has stated that the weakness in demand for vehicles that we’re seeing so far in 2024 has the potential to plague the industry going forward and will continue to put pressure on pricing. With this backdrop, many investors may be wondering where to go with their money if they want to invest in the automotive space. The answer to that question is quite simple – automotive repair.
Where to Invest in the Automotive Space?
As new cars become too expensive to consider buying, your typical consumer is likely to head toward used cars, which typically require more repair and maintenance than a brand-new vehicle. Because of this trend, automotive companies that are dabbling in dealing with and repairing used vehicles may be poised to become new automotive stock investor favorites. According to Carvana CEO Ernie Garcia’s interview on CNBC’s “Power Lunch” this June, the used car market is reasonably stable this year, and used car prices are also down at present, which can be an added incentive for consumers to gravitate towards used vehicles.
Another exciting space within automotive is China, which has been rapidly growing its presence within the automotive industry with cheaper and more efficient vehicles. Going back to our discussion on price wars, we see that Chinese automakers are actually doing surprisingly well in providing low-cost EVs especially, which has led to experts such as Michael Dunne, founder and CEO of Dunne Insights, dubbing China the “world’s center of automotive manufacturing,” in an August interview with CNBC’s “Squawk Box Asia.” Dunne noted that China can produce cars more cheaply than anyone else in the world and that it has built more EVs than every other player, which has enabled it to export cars to more than 100 markets worldwide.
Considering this rapid growth, investors looking to pick up some automotive players could do well by considering companies that have longstanding partnerships with Chinese manufacturers, or by directly picking up Chinese car makers for their portfolio. The list we’ve compiled below has several companies that fit the first of these descriptions, alongside several other automotive players in the repair space.
Our Methodology
We used a stock screener to identify stocks in the automotive parts and repair businesses. We then shortlisted the stocks based on the number of hedge funds holding stakes in them, from the lowest to the highest number, by using Insider Monkey’s hedge fund data for the second quarter.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A customer smiling delightedly after driving away in their new car from the automotive retail shop.
Asbury Automotive Group, Inc. (NYSE:ABG)
Number of Hedge Fund Holders: 30
Asbury Automotive Group, Inc. (NYSE:ABG) is an automotive retailer that also offers vehicle repair and maintenance services, replacement parts, and collision repair services. It is based in Duluth, Georgia.
The company managed to generate impressive second-quarter results despite challenges such as the CDK outage caused by ransomware attacks on CDK Global, which impacted several automotive companies. Asbury Automotive Group, Inc. (NYSE:ABG) had an effective backup to deal with repair orders during the outage, namely its showroom map and ClickLane tool, which enabled it to recreate about 100,000 repair orders and facilitate in-person transactions that may have started online during the outage.
Through such measures, Asbury Automotive Group, Inc. (NYSE:ABG) was able to mitigate the impact of the outage on its financial performance and ensured that it delivered record second-quarter total revenue and parts and service revenue with $581 million and gross profit of $340 million.
The resilience shown by Asbury Automotive Group, Inc. (NYSE:ABG) during the outage has impressed many investors, raising the overall popularity of the stock. Additionally, the company has been focusing on raising its profit margins within its service business in particular, the fruits of which were harvested in the second quarter, when it saw incremental growth in services and other segment revenue. Asbury Automotive Group, Inc. (NYSE:ABG) has also been inspiring investor confidence because its approach to capital allocation promises an optimal balance between acquisitions, organic investments, and share repurchases. Through these strategic moves, the company is ensuring that it sticks to a path that increases its market share, grows its worth, and returns value to its loyal shareholders.
There were 30 hedge funds long Asbury Automotive Group, Inc. (NYSE:ABG) in the second quarter, with a total stake value of $1.4 billion. Abrams Capital Management was the largest shareholder, holding 2,108,540 shares.
Bonhoeffer Capital Management mentioned Asbury Automotive Group, Inc. (NYSE:ABG) in its fourth-quarter 2023 investor letter:
“Our broadcast TV franchises, leasing, building products distributors and dealerships, plastic packaging, and roll-on roll-off (“RORO”) shipping fall into this category. One trend we find particularly compelling in these firms is growth creation through acquisitions, which provides synergies and operational leverage associated with vertical and horizontal consolidation. The increased cash flow from acquisitions and subsequent synergies are used to repay the debt and repurchase stock; and the process is repeated. This strategy’s effectiveness is dependent upon a spread between borrowing interest rates and the cash returns from the core business and acquisitions. Over the past 12 months, interest rates have been increasing, which has reduced the economics of this strategy; but a large spread still exists if assets can be purchased at the right price. Increasing interest rates have affected the returns on public LBO firms. Some firms have been reducing debt to reduce the impact of higher rates on earnings.
Asbury Automotive Group, Inc. (NYSE:ABG), a US-based automobile dealer group, a portfolio holding, is an example of a private LBO. Given Asbury’s current valuation of an 18% earnings yield and, more importantly, a five-year forward earnings yield of 38%, buybacks are accretive. Management has developed a long-term plan that includes acquisitions and operational leverage from internet sales and pre-paid service plans. The net income annual growth is expected to be 25% over the next two years based upon management’s plan. Holding the current modest 6 times multiple of earnings constant, the rate of earnings growth implies a 25% total return…” (Click here to read the full text)
Overall ABG ranks 10th on our list of the best car repair stocks to buy. While we acknowledge the potential of ABG as an investment, we believe that AI stocks hold promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ABG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.