U.S. auto & truck dealerships | Positive news likely reflected in pricing rebound

1. New vehicle retail sales rose 11% YoY and 15% QoQ in Q2 as supply chain constraints eased.

2. Listed new car dealerships are up more than 50% year-to-date, outperforming the S&P's 17% year-to-date rally. This jump may reflect better-than-expected car pricing, strategic actions (M&A, buybacks), and better macroeconomics.

3. New pricing decreased slightly q/q, and used pricing dropped significantly in June. We still expect pricing to normalize, with rising interest rates and increased vehicle supply likely to drive price adjustments. AN and LAD 2Q EPS estimates are expected to be slightly below consensus, but we remain positive and raise our target price after the recent rally.

According to the following analysis, we predict that although the US auto and truck dealers are slightly below the Q2 EPS expectations, the positive news may appear after the pricing rebound, and the market still has potential for development.

U.S. light vehicle sales were strong in the second quarter, with sales up 17% year-over-year and 15% quarter-over-quarter. The average SAAR for the second quarter was 15.6, an increase of 2% from the average SAAR of 15.3 in the first quarter and a 17% increase from 13.3 in the second quarter of last year. Retail SAAR was up 11% year-over-year in the second quarter, while fleet SAAR was up 49% year-over-year.

The brand mix held by AN and LAD increased quarter-on-quarter, exceeding the industry average. Mercedes-Benz (+37%), Honda (+22%), Toyota (+21%) and STLA (+18%) all posted higher quarter-on-quarter sales than the industry average (+15%). All brands posted year-over-year growth, with Honda (+45%), Jaguar Land Rover (+41%), Nissan (+31%) and General Motors (+20%) all outperforming the industry average of 19%.

Both companies are expanding their addressable markets. LAD is focused on widening driveways and using them for car financing through DFC. AN is expanding into the used car space with AutoNation USA, recently acquiring RepairSmith to complement the high-margin service business where used cars dominate the market.

The average new car price fell 1.4 percent month-on-month from April to June, but was still up 3.3 percent year-on-year, according to Bloomberg data. Although the new pricing decreased slightly QoQ, we still expect pricing to normalize, which will put pressure on dealers' new pricing. Rising interest rates and increased vehicle supply could drive price adjustments. We continue to see inventory builds and OEM incentives increase.