Automakers don’t always come out on top despite sky-high prices and rising customer demand.
Automakers report revenue declines despite skyrocketing prices and soaring customer demand. This is despite the fact that most of them are using the “normal” quarter before the pandemic to compare financial results.
This is due to a shortage in computer chips, which has restricted production of new vehicles. Due to tight inventories, prices for new and used cars are at record highs. This has raised inflation pressures in the US.
Edmunds reports that the June average car sale was less than the May record of $41,000, which is 10% more than June 2019. Even more dramatic was the 28% increase in average car prices over two years to record $26,500
These are the real winners of this price environment. Dealers in cars.
Independently owned dealers buy used cars at fixed prices from the automakers. These wholesale prices are stable and have resulted in unprecedented margins for new car sales.
Selling new cars can be the most profitable part of any car dealer’s business. While used car sales can be more lucrative, service and repairs are the most profitable.
Although the majority of dealers are privately-owned, there are a few publicly traded groups of dealer groups. AutoNation (AN) is the largest in the country, accounting for about 2% of the US marketplace. These are great times regardless of whether they’re a locally-owned or publicly traded dealer group. Ali Faghri is an analyst with Guggenheim Partners who tracks dealership stocks.
Faghri stated that all will bring in record profits. I believe prices may have peaked. These market conditions are likely to continue through 2023.”
Dealerships faced dire financial difficulties a year ago. The sector was in a difficult second quarter of last year, with many closing down due to stay-at home orders. Record job losses also temporarily killed the demand.
Cox Automotive conducted a survey of over 1,000 dealers and found that dealer confidence for the second quarter 2020 was at an all time low of 20. If the number is higher than 50, it means that more dealers consider conditions to be strong or positive and less negative.
It is amazing how much a year can make. A record-breaking 70 confidence level was found in the most recent survey, which was conducted between April and May.
Faghri believes that dealers will see even more success in the future, as traditional service revenue has not returned to its normal levels. This is the area that Faghri expects to experience a significant increase in demand.
He said that many people didn’t drive much and weren’t doing any work during the pandemic. I believe there is a lot pent-up demand for services and delayed maintenance which will have to be addressed.
Used cars are being sold at a higher price by dealers, particularly those purchased from auctions. Rental car agencies, which often put many cars on the market, have slowed down sales by reducing the supply.
As travel was at an all-time low, major rental car agencies sold about a third their fleets in 2020 to make the necessary cash to continue operating. They are now having difficulty replenishing their fleets due to the shortage of chip. The rebound in rental demand has caused rental prices to more than double before the pandemic. This is causing record-breaking car prices.
In an effort to increase inventory, some dealers now advertise that they will buy vehicles rather than sell them. Companies are offering to purchase used cars through robocalls.
Despite the higher costs of acquiring used cars inventories, dealers still make more on used car sales than ever. Carmax (KMX), which is the biggest used car dealership only, already reports record profits. AutoNation will report its results on Monday to kick off an unprecedented string of earnings for the sector. The chip shortage has caused increased costs for automakers, so they won’t be saying the same when reporting their results this month. Ford expects to post a loss despite record-setting prices.
Publiated at Sun, 18 July 2021 16:21.45 +0000