Elevated Car Prices: The Good and the Bad for Auto Stocks

Despite strong demand, major automakers reported lower deliveries in the first quarter as persistent chip shortage and supply chain issues amid the Ukraine-Russia conflict and lockdowns in China continued to hamper production and inventory levels.

Meanwhile, pent-up demand and tight inventory have led to a sharp rise in new car prices compared to pre-pandemic levels. Even used car prices have skyrocketed over recent months backed by strong demand.

Rising car prices are helping carmakers offset the impact of weaker volumes and increased input costs to some extent. However, there is a flip side to this.

Higher car prices are driving away less-affluent customers, who are already being burdened by food inflation and climbing gasoline prices. Further, rising interest rates are making matters worse for prospective buyers, as they will end up paying larger installments.

According to data provider Edmunds, the average monthly payment for new vehicles bought in Q122 is expected to climb to $648, the highest level that Edmunds has on record, compared to $639 in Q421.

Citing a survey by the Conference Board, a Reuters report highlighted that the number of consumers intending to buy a new or used vehicle in the next six months fell in March for the second month in a row, with those planning on buying used vehicles being at the lowest levels in 15 months.

Given the uncertainty associated with the auto industry’s supply chain woes and the impact of higher prices, we’ll discuss Wall Street’s opinions about auto heavyweights Ford and General Motors, and used-car retailer CarMax.    

Ford (NYSE: F)

Auto giant Ford’s U.S. sales volumes plunged 17% year-over-year to 432,132 vehicles in Q122, reflecting the impact of a global shortage of semiconductor chips. Meanwhile, the company sold 125,000 vehicles in China in Q122, down 18.8% year-over-year.

Regarding its U.S. deliveries, Ford noted that March retail sales increased 23.2% month-over-month, thanks to improved production and inventory. It also highlighted that year-to-date EV sales jumped 37.9% in Q122.

Given the tremendous opportunities in EVs, Ford plans to spend $50 billion on EVs by 2026, including $5 billion this year. The company expects EVs to account for about a third of its 2026 volumes and half by 2030.  

Ford recently announced that it will reorganize its EV and legacy internal combustion engine businesses into two separate units as part of its strategy to scale the EV business. The new unit for EVs is named Ford Model e, while the legacy business is called Ford Blue.

Meanwhile, Barclays analyst Brian Johnson feels that despite the recent selloff, investors are still underestimating risks to the auto and auto parts sector from inflation, production pressures, and the impact of interest rate hikes and higher vehicle prices on affordability for car buyers.

Johnson downgraded his sector outlook to Negative based on the current challenges. He also downgraded Ford to a Hold from a Buy, citing “soft execution” and sector concerns, and lowered the price target to $17 from $23.

Overall, the Street is divided about Ford, with a Moderate Buy consensus rating based on six Buys and six Holds. The average Ford price target of $21 suggests 34.01% upside potential from current levels. Shares have declined 24.5% so far this year.

General Motors (NYSE: GM)

General Motors’ Q122 U.S. vehicle deliveries declined 20.1% year-over-year to 512,846. The automaker noted that while supply chain disruptions are “not fully behind us”, it expects to continue outperforming 2021 production levels, especially in the second half of this year.

COVID-19 spikes and the ongoing semiconductor shortage also hampered GM’s China Q122 deliveries by 21.4% to 613,300 units.   

Meanwhile, GM continues to ramp up its EV production to address growing demand amid higher fuel prices. The company plans to have the capacity to build 1 million EVs in North America by the end of 2025. It has undertaken several initiatives to create a new and more secure EV supply chain, including projects involving key EV materials and components.

As part of its EV focus, GM and Honda announced that they will be co-developing a series of affordable EVs based on a new global architecture using next-generation Ultium battery technology. The two companies expect the new EV series to go on sale in 2027, starting in North America.

Recently, BNP Paribas initiated coverage on General Motors and Ford. The firm noted that the Detroit auto giants are deploying considerable resources to transform core operations and push electrification.

Overall, General Motors scores a Strong Buy consensus rating based on 14 Buys and three Holds. Following nearly a 31% year-to-date decline, the average General Motors price target of $71.13 implies 75.07% upside potential from current levels.

CarMax (NYSE: KMX)

CarMax is a leading used car retailer, operating 230 stores as of FY22 (ended February 28, 2022). The company disappointed investors with its recent performance. Notably, Q4 FY22 EPS declined about 23% year-over-year to $0.98, significantly lagging analyst forecasts of $1.33.

Revenue grew 49% to $7.69 billion, slightly ahead of analysts’ estimates of $7.67 billion. Overall, units sold grew by 11.3% to 343,413 as robust wholesale volumes were partially offset by a 5.2% decline in retail used units sold.

CarMax cited declining consumer confidence, the Omicron outbreak, vehicle affordability, and the “lapping of stimulus benefits” paid in the prior-year quarter as reasons for the lower retail volumes.     

Following the print, JP Morgan analyst Rajat Gupta downgraded CarMax to a Hold from a Buy and cut the price target to $110 from $130.

Gupta stated that while CarMax has less relative downside in a mild near-term recession due to its better balance sheet leverage and free cash flow support, he feels that shares are not compelling enough to recommend given the “material cut” required to near-term estimates in a likely worsening affordability backdrop before it gets better.

Other analysts on the Street are cautiously optimistic, with a Moderate Buy consensus rating based on six Buys and five Holds. The average CarMax price target of $120.90 suggests 32.70% upside potential from current levels. Shares are down 30% year-to-date.

Conclusion

High demand and supply constraints have led to a significant surge in new and used car prices. However, higher prices could act as a deterrent for prospective car buyers, especially those with modest incomes. With major carmakers already struggling with lower sales volumes due to supply issues, any further deterioration in business due to car affordability could drag down car stocks further.

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