Used cars sit on the sales lot at Frank Bent's Wholesale Motors in El Cerrito, California.
Justin Sullivan/Getty ImagesIt’s getting expensive for car buyers to replace their ride. Higher used-car prices, however, are good for car-related stocks.
The Manheim used-vehicle value index, a widely followed measure of used-car prices, set another record in April , up 8% from March and up more than 50% year from last April.
“This used-car boom is getting old,” quipped Morgan Stanley analyst Adam Jonas in a research report Friday. The used-car price boom has been remarkable. Pickup-truck prices are up 76% year over year. Pricing for used cars coming off rental is up 20% compared with 2019 levels, even though rental cars being sold in 2021 have far more mileage.
Jonas sees car-dealer stocks and auto-rental giant Avis Budget Group (ticker: CAR) benefiting from the higher used-car prices. Dealers make a spread on used- car transactions and the spread should widen. Jonas rates Avis stock Hold and has a $73 price target. He rates Carvana (CVNA) and CarMax (KMX) stocks Buy. His price target for those two are $420 a share and $165, respectively.
At midday, Avis was down 0.3% to $83.62. Carvana had fallen 4.1% to $252.55 and CarMax was down 0.3% to $129.74. Meanwhile, the S&P 500 was 0.6% lower at 4,227.60.
Jonas’ top pick is General Motors (GM). He rates the stock Buy and has an $80 price target. While GM doesn’t benefit directly from used-car prices, higher used- car prices are a tailwind to new-car prices too. A car-buying decision is complicated and used-car prices influence whether or not consumers will buy new or used cars. At midday, GM shares were flat at $58.79.
Car pricing is so high because there aren’t enough cars. A global semiconductor shortage is hampering new-car production and companies, such as Avis, weren’t in the mood to buy a lot of cars in 2020 amid the global pandemic. Avis’ net capital spending–cars sold less cars purchased–totaled $88 million in 2020, down from $239 million in 2019.
But this year, business has improved much faster than anyone expected. The magnitude of the surprise is reflected in used-car pricing.
To be sure, some of the good news is priced in. The four stocks listed are up an average of 53% year to date, crushing comparable returns for the S&P 500 and Dow Jones Industrial Average. Avis stock is up the most, gaining 127%. Carvana shares are only up 7%.
Write to Al Root at allen.root@dowjones.com
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