Used car prices surged to record highs in the second quarter of 2021 amid multi-year high inflation, causing sales to decline. However, prices are dropping lately, which should elate potential buyer interest and boost car sales. According to a comprehensive research report by Market Research Future (MRFR), the used car market is projected to grow at a CAGR of 5.61% between 2021 and 2027.

The robust domestic demand and consumer spending amid the sluggish new car production should drive the used car market’s growth in the near term. As a result, AutoNation, Inc. (AN) and Group 1 Automotive, Inc. (GPI) is well-positioned to benefit substantially.

However, with bleak financials and limited growth prospects, used car stocks Carvana Co. (CVNA) and CarMax, Inc. (KMX) are best avoided now.

Stocks to Buy:

AutoNation, Inc. (AN)

AN operates as an automotive retailer operating through three segments: Domestic, Import, and Premium Luxury. It offers a range of automotive products and services, including new and used vehicles; and parts and services, such as automotive repair and maintenance, and wholesale parts and collision services.

On May 25, AN announced the opening of AutoNation USA San Antonio, the first of five additional stores that the company plans to open this year. The company targets to have over 130 AutoNation USA stores in operation from coast to coast by the end of 2026. This should enable the company to leverage the AutoNation brand to capture a larger share of the used vehicle market.

AN’s revenues increased 54% year-over-year to $6.98 billion in the fiscal second quarter, ended June 30. Its operating income was up 163% from the year-ago value to $530.2 million. AN’s net income came in at $384.9 million, indicating a 38% rise year-over-year. The company’s EPS increased 52% year-over-year to $4.83.

The street expects AN’s revenues to rise 10.2% year-over-year to $5.96 billion in the current quarter ending September 2021. The consensus EPS estimate of $2.42 for the ongoing quarter indicates a 1.7% improvement year-over-year. In addition, AN surpassed the Street EPS estimates in each of the trailing four quarters. Shares of AN have gained 122.4% over the past year and 69.9% year-to-date.

It’s no surprise that AN has an overall rating of A, which equates to Strong Buy in our POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

AN has a grade of A for Value and a B for Growth and Quality. Of the 25 stocks in the B-rated Auto Dealers & Rentals industry, it is ranked #2.

To see additional POWR Ratings for Momentum, Stability, and Sentiment, click here.

Group 1 Automotive, Inc. (GPI)

GPI operates in the automotive retail industry. The company sells new and used cars, light trucks, vehicle parts, and service and insurance contracts; arranges related vehicle financing; and offers automotive maintenance and repair services.

On July 6, GPI announced the expansion of its U.K. operations with the acquisition of nine businesses northeast of London, primarily in the region of East Anglia. The company expects to raise $300 million (approx.) in total annual revenue from this acquisition.

GPI’s revenues increased 73.6% year-over-year to $3.70 billion in the fiscal second quarter ended June 30. Income from operations stood at $265.80 million, up 236.3% from the same period last year. Its net income grew 532.9% from the year-ago value to $191 million. The company’s EPS was an all-time quarterly record of $10.35, increasing 533.9% year-over-year.

The consensus revenue estimate of $12.79 billion for the current year indicates a 17.9% increase year-over-year. Street expects the company’s EPS to rise 32.4% from the prior year to $23.91 in the ongoing year. GPI has an impressive earnings surprise history as well, as it beat the consensus EPS estimates in three out of the trailing four quarters.

Over the past year, GPI gained 83.5% to close yesterday’s trading session at $165.79. The stock has gained 24.5% year-to-date.

GPI has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. In addition, GPI has a grade of A for Value and a B for Quality. It is ranked #5 in the same industry.

Click here to view additional GPI ratings for Growth, Momentum, Sentiment, and Stability.

Stocks to Avoid:

Carvana Co. (CVNA)

CVNA operates an e-commerce platform for buying and selling used cars. The company’s online platform allows its consumers to research and identify a vehicle, inspect it using its 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase the vehicle, and scheduled delivery or pick-up.

In the second quarter ended June 30, CVNA’s net income came in at $22 million, indicating an improvement of 153.7% from a net loss of $41 million in the same period last year. Cash and cash equivalents balance declined 15.3% year-over-year to $310 million in the six months ended June 30.

Analysts expect CVNA’s revenues to increase 67.4% year-over-year to $2.56 billion in the current quarter ending September 2021. However, the company’s EPS is expected to remain negative at least until the next year. Shares of CVNA slumped 2.5% over the past five days to close yesterday’s trading session at $337.00.

It is no surprise that CVNA has an overall rating of F, which equates to a Strong Sell in our proprietary POWR Ratings system. The stock also has an F grade for Value and Quality and a D grade for Growth and Stability. Among the 74 stocks in the F-rated Internet industry, CVNA is ranked #73.

To see additional CVNA ratings for Sentiment and Momentum, click here.

CarMax, Inc. (KMX)

KMX is a retailer of used vehicles, operating in two segments, CarMax Sales Operations, and CarMax Auto Finance. The company’s products and services include retail merchandising, wholesale auctions, extended protection plans (EPPs), reconditioning and service, and customer credit.

In June, a class-action lawsuit was filed against KMX for fraud and violations of California business law. The lawsuit claims that the company has unlawfully sold vehicles that failed to meet California emissions standards to unlicensed dealers.

KMX’s total cost of sales increased 135.6% year-over-year to $6.77 billion in the fiscal first quarter ended May 31. Cash and cash equivalents balance decreased 15% from the prior-year quarter to $1.07 billion over this period.

Street expects the company’s EPS to rise 1.1% from the prior year quarter to $1.81 in the current quarter. However, the company’s EPS is expected to decline 1.4% year-over-year to $1.40 in the next quarter ending November 2021.

KMX has gained 1.6% over the past month. The stock lost marginally intraday to close yesterday’s trading session at $136.00.

KMX has a grade of D for Quality in our proprietary POWR Ratings system. Additionally, it is ranked #18 in the Auto Dealers & Rentals industry.

Beyond what we’ve stated above, we have also rated KMX for Growth, Value, Sentiment, Momentum, and Stability. Click here to view all KMX ratings.

CVNA shares were trading at $346.92 per share on Friday afternoon, up $9.92 (+2.94%). Year-to-date, CVNA has gained 44.83%, versus a 19.12% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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