December 4, 2021

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Hertz Global, Avis Budget Group, Ally Financial and Kar Auction Services

For Immediate Release

Chicago, IL – April 27, 2020 – announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Hertz Global HTZ, Avis Budget Group Inc. CAR, Ally Financial Inc. ALLY and Kar Auction Services KAR.

Here are highlights from Friday’s Analyst Blog:

Is the Used Car Market Headed for Trouble?

Global economic growth has come to a grinding halt owing to the outbreak of coronavirus pandemic. Production shutdown, factory closures, supply-chain disruptions and depressed demand for vehicles amid weak consumer sentiment have ripped apart the auto sector. The used-vehicle industry is also in turmoil. The used car market, which had gained traction over the last few years, is now starting to feel the pain from COVID-19. Amid the pandemic, the used car business — part of auto retailing on which franchised dealers have become increasingly dependent in recent years — is gradually starting to mirror 2008-2009 decline.

Abrupt Turnaround in Used Car Market

With new cars becoming expensive, affordable used vehicles’ popularity increased. Franchised dealers had hoped 2020 to be the banner year for used-vehicle sales. However, an abrupt drop in activity due to the pandemic is likely to deal a heavy blow to the used car market.

Even until February, online upstarts and dealerships had been seeing huge profit opportunities in their used-vehicle departments. Auto retailers like Sonic Automotive, CarMax, Carvana and AutoNation, among others, had been focussed on ramping up their inventory in a bid to capitalise on the red hot used-vehicle market. However, given pummelling retail demand and sinking wholesale prices, the dealerships are now approaching trade-ins with caution.

The virus outbreak resulted in a major upheaval in the $1.5-trillion used car market. With shelter-in-place orders imposed on multiple states to combat the spread of the pandemic and dampening consumer confidence, used-vehicle sales in the United States have nosedived.

Retail used-vehicle sales and wholesale auction volumes are also shrinking. According to J.D. Power, the wholesale auction value for the week ended Apr 12 tanked 83% to 19,000 from the pre-outbreak weekly average of 113,000. In the first 12 days of April, retail used-vehicle sales for franchised dealers plunged 63% from the corresponding period of 2019. 

Used Car Price Collapse Adds to Gloom

As if things were not already dreary for the sector, the prices of used car have now started to crater. Weak demand, unusually timed off-lease inventory and lower auction prices are resulting in a drop in used car values. Incentives from automakers for new vehicles in response to the coronavirus crisis will further depress the prices of off-lease used vehicles.

Auction prices for used cars are falling significantly. Orders are slowing too. As supply is exceeding demand, used car values are going into a tailspin, similar to what happened during the 2008 financial crisis. In addition to excess supply, there is a dearth of bidders. The bidders doubt if they can resell what they buy and are, instead, waiting for prices to fall further.

This drop in used-car prices is likely to create pressure in several areas of automotive chain, resulting in myriad challenges.Used car prices impact new car prices, rental car firms, and dealership earnings and lease residual values. The residual value is the estimated wholesale value that the vehicle will retain at the end of the lease period. While the firms are expecting the used car prices to fall, any larger-than-expected price drop will lead to massive losses from leasing impairments. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Financing arms of General Motors and Ford are likely to incur multibillion dollar losses associated with the drastic drop in used-vehicle prices, per JP Morgan Chase. American used car value index, Manheim, fell 11.8% in the first half of April owing to halting used car wholesale auctions as a result of coronavirus-induced economic lockdown, thereby dashing any hopes of recovery for firms’ captive-finance subsidiaries. The last time the index witnessed declines of such magnitude was during the 2008-09 financial crisis.

Finance subsidiaries of automakers like General Motors, Ford, Fiat Chrysler and others will feel the heat from dim prospects of the used vehicle market. Rental car companies like Hertz Global, Avis Budget Group Inc. are likely to be hit the most. Auto-heavy lenders including Ally Financial Inc. and Santander Consumer, along with used car and parts enterprises like Kar Auction Services, Copart and LKQ Corporation, among others, will also suffer drastically. While Cascade Auto Group witnessed record sales in the first two months of 2020, the sales momentum was thwarted by the coronavirus outbreak in March. The firm is now approaching both trade-ins and the wholesale market with caution.

No Quick Recovery In Sight

In just a span of a few weeks, used vehicle values have declined significantly, which has left dealers in a dilemma of how to handle trade-ins and how much volumes to stock in. Auctions have been halted for weeks now. The excessive supply of used cars will further lower the wholesale prices, once they resume. Additionally, sell-offs from overstocked rental fleets will only exacerbate problems. The rental companies that have been left with more than enough cars due to COVID-19 restrictions are likely to dispose off more used rental vehicles than usual, dragging the prices lower.

J.D. Power forecasts used-vehicle prices to fall 7% through June, before recovering in the latter half of the year. However, the outlook is uncertain and is entirely dependent on the duration of the pandemic and recovery of the economy.  The United States has currently lost around 22 million jobs, as coronavirus ravages the economy. Many are expecting the unemployment rate to hit 17%, way more than what it was during the time of the Great Recession. Given the soaring unemployment, loan defaults will be on the rise, which will contribute to wholesale inventory buildup. Amid all the gloom and doom, the Manheim index could be headed for the steepest decline on record.

It should be noted that excessive used-vehicle supply in 2009 was eventually absorbed but at much depressed prices. However, once the excess supply was depleted, the values of used cars started to rise. A similar trend may be witnessed even now. As long as the demand and supply remain out of balance, used car prices will suffer.

Once the stay-at-home orders are lifted and auction activities resume normalcy, a clearer picture will likely be revealed. There is a tremendous amount of risk associated with the used-vehicle market, given weak demand for vehicles and economic uncertainty. It is expected that the dealers will incur significant losses this year. At the most, used-vehicle prices are expected to stabilize once the economy begins to recover. However, it appears like the meaningful recovery of the used-vehicle market will not happen until next year.

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