Analyst Ryan Brinkman is also cautious on auto parts suppliers and manufacturers, cutting his earnings estimates. There is pain ahead up and down the automotive value chain.
Before we get to the investment case for Kar, some bad news for the automotive industry. Brinkman’s earnings estimates for parts suppliers and auto manufacturers are well below Wall Street consensus estimates. He is especially bearish regarding the impact Covid-19 will have on car stocks this year.
(ticker: BWA) first-quarter earnings estimate, for instance, is 36 cents a share. The consensus number is 54 cents. His full-year 2020 earnings estimates for
(GM) were cut from $2.60 a share to $1.20. Brinkman’s full-year
(F) estimates moved from a loss of 75 cents to a loss of $1.25. The consensus 2020 earnings numbers for GM and Ford are a gain of $2.15 and a loss of about 50 cents a share, respectively. He is clearly more bearish than the average analyst.
Brinkman says in a Thursday research report that Covid-19 lockdowns will last longer than expected. That means less production and fewer sales in 2020. “We find it hard to recommend all but the most conservatively capitalized suppliers at the moment.”
(APTV) his top supplier idea, rating shares the equivalent of Buy. His price target is $68. He still rates GM the equivalent of Buy and Ford Hold. The price targets for those stocks are $28 and $6, respectively.
Brinkman is more bearish on the rental-car providers. He downgraded Hertz (HTZ) to the equivalent of Sell from Hold. The Avis (CAR) rating goes to Hold from Buy. The rental-car companies are being battered by “both an unprecedented falloff in air travel and sharply lower used vehicle prices.”
He estimates air travel generates about two-thirds of rental-car business. Air travel in the U.S. is down 95% year over year, based on TSA checkpoint data. The situation is unprecedented.
The good news for investors is that Brinkman still sees a new opportunity for automotive investors in a post-Covid world. He upgraded Kar to the equivalent of Buy from Hold while dropping his price target went from $25 to $19. That is up about 50% from current levels.
“Kar operates in the highly attractive market for auto auctions, characterized by high barriers to entry, oligopoly, and strong pricing and margins,” Brinkman says. Kar is the second-largest auto-auction company, and with shares down more than 40% year to date, he thinks the price is right.
Adesa, the company’s wholesale unit, remarketed 3.8 million cars in 2019. Auctions are continuing online.
The automotive universe is large. Trillions of dollars worth of new cars are sold around the globe each year. Used cars, along with parts and service, are an additional trillion-dollar market.
“Aftermarket names are best positioned,” Brinkman says. The turmoil of Covid-19 is hitting car sales but, looking ahead, the used-car market should be a little more stable.
Corrections & amplifications: J.P. Morgan’s price target for Kar is now $19 a share. An earlier version of the article and headline cited the prior price target of $25 a share.
Write to Al Root at firstname.lastname@example.org