The coronavirus pandemic hit the auto sector hard, resulting in sluggish demand for vehicles, low footfall at dealerships and supply chain disruptions. However, demand for vehicles is gradually on the mend. While third-quarter U.S. auto sales declined year over year, it rebounded from the sharp plunge witnessed in the second quarter. On a further positive note, sales for September grew year over year. With COVID-19 restrictions easing and people getting used to a new normal, consumers are flocking back to purchase vehicles. 

Increasing consumer confidence, declining unemployment rate and Fed’s efforts to support the economy bode well for the auto industry, which is highly cyclical in nature. Amid the improving landscape, the auto retail industry is flourishing. In addition to rising demand of vehicles, increasing e-commerce initiatives and cost-containment efforts to boost liquidity are also acting as key drivers. Online traffic is on the rise, with auto retailers ramping up digital capabilities to make deals with customers and arrange for home deliveries of vehicles. The shift toward digital shopping has grown at warp speed amid the coronavirus pandemic and will continue even after the crisis.

The used vehicle market is also going pretty strong. In fact, sales of used vehicles have held up better than new cars. Used car demand from mass-market brands is gaining momentum, which is expected to continue. Most of the firms including Sonic Automotive, CarMax KMX and Carvana CVNA have started witnessing higher year-over-year used car sales.

The fact that the Auto Retail & Whole Sales industry is flourishing is evident from its Zacks Industry Rank #5, which places it in the top 2% of more than 250 Zacks industries. Below we have highlighted three top-ranked stocks that are poised to deliver strong year-over-year results for the third quarter of 2020. These companies have released impressive preliminary numbers, which bolstered investors’ confidence further. Each of these firms displays a VGM Score of A and has impressive earnings surprise history.

Group 1 Automotive GPI: Group 1 expects earnings per share in the band of $6.25-$6.65, indicating a surge of 112-125% from the year-ago figure of $3.02. The firm anticipates higher year-over-year gross profit growth on improved margins for both new and used vehicles, which more than offset weak sales volume amid tight inventory levels.

Cost-containment efforts seem to have paid off. U.S. SG&A expense as a percentage of gross profit is likely to remain well below historical levels. U.K. SG&A expense as a percentage of gross profit is also expected to be well below 2019 levels on the back of comps growth, and higher vehicle sales as well as service levels. Moreover, the company’s Brazilian operations managed to remain in the black despite low footfall in its dealerships in Sao Paulo amid the pandemic. On further encouraging note, Group 1 announced a $200 share repurchase authorization and anticipates resuming dividend payouts in mid-November.

It surpassed earnings estimates in each of the last four quarters, with an average of 98.1%.  The stock surged roughly 39% during third-quarter 2020. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lithia Motors LAD: Lithia — which presently flaunts a Zacks Rank #1 — forecasts net income per share in the range of $6.10-$6.40 for third-quarter 2020, suggesting a 68-76% increase from the year-ago period’s $3.64. The bottom-line projection also indicates a year-over-year surge of 80-89% from the year-ago adjusted net income per share of $3.39. The top line for the third quarter is expected to increase in the mid- to high- single-digit range from the year-ago quarter’s revenues of $3.3 billion.

Notably, the company witnessed sequential increase in same-store sales across all business lines during the third quarter. Moreover, same-store gross profit margins remained flat to higher than the second quarter’s stellar levels. Lithia’s e-commerce home solution, Driveway — launched early September — also helped it in stoking sales and driving the firm’s profitability during third-quarter 2020.

Lithia has a trailing four-quarter earnings surprise of 37.9%, on average. The stock has rallied nearly 47% during the July-September period.

Sonic Automotive SAH: Based on robust growth of the EchoPark segment, Sonic expects third-quarter earnings per share in the band of $1.08-$1.15, suggesting 64-74% increase from the year-ago level. Per the preliminary results released by the company in mid-September, used vehicle unit sales volumes at the EchoPark segment rose 19% and 4% year over year for July and August, respectively. Volumes further surged 36% for the first half of September from the comparable year-ago period. 

Strong organic growth fueled by EchoPark expansion is significantly boosting Sonic’s growth profile. The firm plans to add 25 EchoPark locations per year from 2021 to 2025. Importantly, Sonic — which carries a Zacks Rank #2 (Buy) currently — targets $14 billion in annual EchoPark revenues by 2025.

It surpassed earnings estimates in each of the trailing four quarters, with an average of 57.8%. The stock has increased around 27% during third-quarter 2020.

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Sonic Automotive, Inc. (SAH): Free Stock Analysis Report

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