The vehicle market in the United States may never be the same again, a change after United Auto Workers (UAW) unions finalized a successful deal with the prominent car manufacturing names in the U.S. The agreement left a bigger bill to be paid in higher salaries, squeezing the already thin profits at these car companies.
This means for you and other consumers in the market that beloved brands like Ford (NYSE: F) and General Motors (NYSE: GM) may begin to cut corners when it comes to quality to still make a profit after needing to boost salaries. This is a likely scenario unless they can move quickly to modernize their plants in automation.
So look, if American brands are to become more expensive due to these strikes, and the average car loan is rising in cost due to interest rate hikes... What can you do? Keep your current car, insure the heck out of it, and ensure you replace all parts that need to be replaced. Here's where Hagerty (NYSE: HGTY) and AutoZone (NYSE: AZO) come in.
Introducing market sentiment
There's a reason why stocks like CarMax (NYSE: KMX) are trading at 72.0% of their 52-week highs, which is - according to Wall Street - an official bear market. Anything with a 20.0% or larger discount from those highs can be considered one. And there's a reason behind the price action.
For a while there (first two quarters of 2023), CarMax stock was rallying pretty hard since virtually all new car dealers were out of inventory. The markup prices being asked for drove away customers into the used vehicle arena, where CarMax rose to glory.
Today, that has changed; the average American is paying an average of $725 monthly for a new vehicle and $516 for used cars. These rates represented an 11.5% and 2.2% increase from twelve months ago for each.
This means that switching your car for a new one - or even trading for another used one - is not the smartest move.
So going back full circle is leaving consumers with only one sensible option: run your current car a bit longer, but make sure you eliminate the risks of having to replace it until the market comes back to normal. There are two ways to go about this one.
First, ensure you are adequately insured against any possible accident that may cost you more than you are saving by not replacing your car; second, ensure that all maintenance is done, including replacing those annoying spark plugs.
There's a reason why AutoZone is now running a commercial reminding you that they do a free check-up on your car, to make sure they can catch all you need before it's too late; their marketing department sure did the homework on today's environment.
A new solution
Comparing the price action in Hagerty and AutoZone versus a dealer like CarMax will clarify this thesis. Hagerty stock is trading at 82.0% of its 52-week high, officially in bull market territory, while AutoZone is flirting with a new all-time high with 94.0%.
Nobody should rely on price action alone to guide their investment decisions, which is why checking analyst projections and sentiment is also important here. For Hagerty, analysts have placed an industry-leading set of numbers that will keep you on the edge of your seat.
Starting with a price target of $11.0 a share, the stock needs to rally by as much as 28.8% from today's prices to meet it. More than that, projections suggest that earnings per share at the firm are set to jump by 180.0% in the next twelve months!
This shouldn't come as a surprise to you, knowing what you know now about the dynamics seen in the car market. But will all these benefits trickle down to AutoZone as well?
Hot off the press, the company's quarterly earnings results suggest that this is the case. Beyond favorable price action, the fundamentals are also backing the story here. Net sales rose by 13.7% over the year, while earnings per share jumped by a massive 18.2% in the same period.
But wait, there's more: despite the recent rallies in the stock, management still repurchased up to 1.3 million shares, indicating that - even at these levels - they think the stock is still cheap.
Today's price targets indicate that the stock still needs to increase by roughly 5.0% to be at its fair value. However, given today's financials, analysts may have much catching up to do.