We recently compiled a list of the 8 Best Car Repair Stocks to Invest In. In this article, we are going to take a look at where AutoNation, Inc. (NYSE:AN) stands against the other car repair stocks.
An Overview of the Global Automotive Aftermarket Industry
According to a report by Fortune Business Insights, the global automotive aftermarket industry was valued at $418.95 billion in 2023. The market is expected to reach $568.19 billion by 2032. The acceptance of electric and hybrid vehicles is expected to propel the growth in demand for related aftermarket products. Moreover, the rise in automotive e-commerce is also contributing to increased sales in the market. As a result, major players in the industry are developing their omnichannel platforms to facilitate online automotive aftermarket services.
The KPMG Corporate Finance recently released its automotive aftermarket report for the fiscal third quarter of 2024. The report highlights that the decline in new car purchases can lead to growth for the aftermarket industry. Despite the recent cut in the Federal Reserve’s interest rates, experts believe new car purchases may not see an immediate uptick. This is because auto loan interest rates typically adjust slowly, thereby remaining high even after the Fed’s actions. Currently, average auto loan rates are still exceeding 9.61% for new vehicles and nearly 14% for used vehicles, which poses a significant barrier to new car purchases. As a result, many consumers are opting to defer vehicle purchases and are increasingly relying on the aftermarket for more affordable maintenance and repair solutions to extend the lifespan of their existing vehicles.
Moreover, the gradual adoption of battery-electric vehicles (BEVs) and software-defined vehicles is reshaping the automotive aftermarket landscape. While these advancements may lead to less frequent maintenance needs, they also introduce new service requirements related to battery systems and advanced electronics. According to forecasts from Bank of America Global Research, BEVs are expected to comprise about 8% of total vehicle sales in 2024, increasing to approximately 29% by 2030.
While analyzing the performance of the industry during the quarter, the report highlighted that the S&P 500 Index and Dow Jones Industrial Average (DJIA) saw significant growth over the past year, up 34.4% and 26.6%, respectively. The Automotive Aftermarket Index grew at a slower pace of 14.3%. However, it is noteworthy that in Q3 2024, this index outperformed both major indices with a growth rate of 8.4%. Specific segments within the aftermarket showed varied performance. For instance, the Parts Suppliers grew by 13.1% while Retailers & Distributors grew by 8.9%. The Enthusiast Products segment rebounded with an 11.3% increase after earlier declines, whereas Service Providers experienced a slight decline of 3.2%.
Regardless of the challenges stemming from high interest rates and inflation the automotive aftermarket has shown resilience and proved to be recession-proof. The shift towards maintaining older vehicles rather than purchasing new ones, combined with technological advancements in vehicle types is fueling growth in the industry. Moreover, trends suggest that while immediate growth in new car sales may be sluggish, there remains a robust demand for aftermarket services and products as consumers adapt to changing economic conditions.
Our Methodology
To curate the list of 8 best car repair stocks to invest in, we used the Finviz stock screener and other listings on the internet. Using our sources we aggregated a list of car repair stocks sorted by market capitalization. Next, we ranked these stocks by the number of hedge fund holders sourced from Insider Monkey’s third-quarter hedge funds database.
Why do we care about what hedge funds do? 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).
An AutoNation-branded dealership, showcasing the wide variety of new and used vehicles on offer.
AutoNation, Inc. (NYSE:AN)
Number of Hedge Fund Holders: 32
AutoNation, Inc. (NYSE:AN) is a major automotive retailer in the United States. The company operates through a network of franchises that sell both new and used vehicles. The company deals in Domestic, Import, and Premium Luxury segments with franchises in each segment selling parts and offering repair services to customers.
The company had a rough fiscal third quarter of 2024, characterized by a CDK outage, which is a major software used by various players in the industry. Its net revenue decreased 4% year-over-year to $6.6 billion, whereas the gross profit also dipped 9% during the same time. However, on the bright side AutoNation, Inc. (NYSE:AN) Customer Financial Services segment and After-Sales segment, led the gross profit 2% higher on a subsequent basis.
Management noted that its After-Sales segment, which deals with parts and repairing services has been showing continuous momentum despite the CDK outage. While the overall revenue of the company dipped, the segment revenue improved by around 1% year-over-year. More importantly, the segment profit margins showed a 50 bps improvement during the same time led by improved parts and labor rates, leverage, and higher value orders. Looking ahead, management notified of improving technician headcount thereby further boosting productivity within the segment. It is one of the best car repair stocks to invest in now.
Conventum – Alluvium Global Fund stated the following regarding AutoNation, Inc. (NYSE:AN) in its Q2 2024 investor letter:
“AutoNation, Inc. (NYSE:AN) (down 3.7%) operates around 350 dealer franchises across the US, as well as collision centres and used vehicle stores. When compared to Group 1, it sells more units at a slightly higher price and margin, and derives around 50% more revenue. But its strategy is different, with nationwide branding and centralised operations. Although we prefer the Group 1 model, the economics of Autonation look attractive to us. And by introducing this into the portfolio we could thereby invest more than 5% of assets in this sector without necessitating the sale of other attractive large positions. And so after selling a little Group 1 and buying Autonation we ended the quarter with 4.1% and 1.9% positions respectively.”
Overall AN ranks 6th on our list of the car repair stocks to invest in. While we acknowledge the potential of AN as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.