AutoNation, Lithia rally despite Wall Street’s ‘demand destruction’ theory

Vehicles are displayed on the market at an AutoNation automobile dealership on April 21, 2022 in Valencia, California.

Mario Tama | Getty Images

DETROIT – Shares of AutoNation, Group 1 Automotive and different automotive sellers rallied Thursday following robust third-quarter earnings and optimistic outlooks relating to client demand for brand new autos.

The outcomes and feedback adopted considerations by some Wall Street analysts that the business may quickly shift from a listing provide drawback to a scarcity of demand, or “demand destruction,” scenario with rates of interest rising, inflation at file highs and recession fears looming.

“Clearly, there is some normalization that’s going to occur and has occurred,” Group 1 CEO Earl Hesterberg instructed traders after the corporate beat Wall Street’s expectations on Wednesday. “But we don’t have any big trepidation about next year … our core businesses such as aftersales and new vehicle sales are moving to remain strong in the near-term.”

Shares of AutoNation had been up by as a lot as 8.2% after the corporate beat Wall Street’s estimates on Thursday. Stocks of others reminiscent of Group 1 Automotive and Penske Automotive that reported third quarter outcomes on Wednesday had been up by greater than 6% throughout intraday buying and selling on Thursday.

Hesterberg’s optimistic feedback echoed these of different executives, who signaled provide chain issues are more likely to hold new automobile inventories tight for the foreseeable future. Inventory ranges of latest autos throughout the third quarter elevated however they remained traditionally low.

General Motors and Ford Motor this week additionally mentioned they noticed client demand holding robust throughout the third quarter, however warned they’re carefully watching exterior financial elements and considerations for any adjustments.

“We haven’t seen any direct impact on our products. Pricing remains strong, demand remains strong for our products, but we can’t ignore what others are saying out there and what others are seeing out there,” GM CFO Paul Jacobson instructed reporters Tuesday after reporting robust third-quarter earnings.

Automakers and retailers imagine they’ve higher insights into client demand than they ever have earlier than, as the businesses have centered extra on particular person, custom-made retail orders, together with buyer reservations, relatively than individuals shopping for autos off seller heaps.

The business is coming down from file income throughout the coronavirus pandemic, and is dealing with decrease wholesale used automobile costs, slowing new automobile worth will increase and different indicators of broad normalizing on the heels of the pandemic and provide chain points.

Vehicle gross sales for a number of dealership teams had been consistent with or decrease than the third quarter of final yr, which some mentioned was resulting from continued manufacturing issues.

Also notably decrease had been common used automobile gross income per unit, or GPU. The common GPU – an necessary statistic for traders – for used autos largely declined double digits in contrast with a yr earlier, together with declines of greater than 20% for Group 1 and AutoNation.

AutoNation CEO Mike Manley instructed traders Thursday that he expects “some mitigation in margins as we get middle-to-end of next year,” however demand is “still going to remain healthy.”

Group 1 mentioned its order banks for brand new autos is at practically 17,000 models, which represents a backlog of six months based mostly on its 2022 gross sales tempo. However, Lithia CEO Brian DeBoer final week mentioned whereas demand stays robust, the corporate would not “have the bigger backlogs that we used to have.”

The beneficial properties in seller shares on Thursday follows much less optimistic feedback from used automobile retailer CarMax in addition to Lithia Motors, which is battling AutoNation this yr for the title of nation’s largest seller, lacking Wall Street’s high and bottom-line expectations final week.

Here’s a have a look at how auto seller shares are acting on Thursday:

–CNBC’s Michael Bloom contributed to this report.

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