JP Morgan analyst Rajat Gupta advised clients that auto dealer stocks are offering an attractive entry point for investors ahead of second quarter earnings.
In a note to clients on Friday, he explained that while price targets on many of the names populating the space, the recent selloff across the sector has punished many names to far too great a degree. Gupta noted that valuations “at trough levels” signal a likely overdone selloff.
“On the setup for the space into earnings, investor debate continues to center around
normalized earnings power with unchanged skepticism around structurally higher
margins/earnings as supply demand imbalance normalizes, recession or not,” he wrote to clients on Friday. “We believe a sooner than expected normalization in supply/demand imbalance and a subsequent faster pull-back in new car GPUs might actually end up being the catalyst needed for multiples to normalize and applied to normalized earnings potential (which we believe WILL be structurally higher than pre- COVID).”
Based upon these dynamics, he reduced his price targets across the space, applying a lower multiple against the uncertain macroeconomic backdrop. However, Gupta noted that this reduction still reflects about 25% upside from current levels.
In terms of stock selection ahead of earrings, Lithia Motors ( NYSE: LAD ) was selected as a top pick due to strong sales growth and differentiated inventory, while AutoNation ( NYSE: AN ) was “Buy” rated based upon its strong balance sheet and attractive valuation. Meanwhile, Group 1 Automotive, Sonic Automotive ( SAH ), Asbury Automotive ( ABG ), and Penske Auto Group ( PAG ) were each rated “Neutral”.
“LAD targets substantial EBITDA opportunity in improving earnings potential of underperforming locations, and we believe consensus is not fully reflecting this,” Gupta said of his top pick. “Continued signs of progress contributing to well-above-average EBITDA growth are likely to drive substantial EPS revisions, which we think skews the risk-reward in LAD’s favor at current levels.”
He assigned a year-end price target of $325 to the stock, suggesting significant upside ahead of its Tuesday morning earnings release .
For further details see:
Auto dealer stocks ‘too cheap’ ahead of earnings- JP Morgan