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HomeMarketAs Carvana Plunges, Consider These 5 Car Dealer Stocks

As Carvana Plunges, Consider These 5 Car Dealer Stocks

After falling almost 40% this past week, Carvana stock is off an incredible 98% this year.

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Emily Elconin/Bloomberg

It was a bad week for
Carvana
—and a bad week for used-car dealers. But some auto-dealer stocks might still be worth buying.

After falling almost 40% this past week, Carvana (ticker: CVNA) is off an incredible 98% this year, wiping out almost $44 billion in market value. That’s more than the size of all other publicly traded auto dealers combined. It’s not hard to see why. Analysts and journalists have started using the word “bankruptcy” to describe where it might be headed. Carvana dismisses this, saying it has “substantial liquidity” to attain its business goals.

The concerns about Carvana, along with falling used-car prices, have dinged other preowned-auto dealers, such as
CarMax
(KMX). Yet Carvana just isn’t big enough for its problems to disrupt the market. It sold about 103,000 used vehicles in the third quarter of 2022, or 1.2% of total U.S. used-car volume. And the Carvana brand “has value, so even if it [restructures] the brand will remain,” says Benchmark analyst Mike Ward.

Carvana says it doesn’t plan to go anywhere. “Our message to our customers, shareholders, employees, and other stakeholders remains clear: We are singularly focused on executing on the plan to profitability outlined in our Q3 Shareholder Letter,” says a spokeswoman. The company ended the third quarter with more than $2 billion in committed liquidity.

However, there is the problem of falling used-car prices. The Manheim Used Vehicle Value Index has declined for five consecutive months and is down about 16% from a January peak. Falling prices are a problem for used-car dealers, which must manage the price they pay, the cost and time to refurbish vehicles, and the final transaction prices.

“Pricing could be a headwind for the industry,” says Ward, adding that a 15% to 20% profit margin decline in 2023 compared with 2022 is already embedded in Wall Street numbers.

New-car dealers are insulated from much of the swing in used car-prices, and their inventory costs and sales prices are more stable. Years of persistently low new-car inventories means buying new is less about haggling than it used to be. They’re “transitioning from a [price] discount model to prestige, more of a relationship business,” says Ward, reminding investors to not forget about the money earned servicing cars, something traditional car dealers do a lot more of than Carvana.

He has Buy ratings on all the dealers with new-car businesses he covers, including
AutoNation
(AN),
Sonic Automotive
(SAH),
Lithia Motors
(LAD),
Group 1 Automotive
(
GPI
), and
Penske Automotive Group
(PAG). Those dealers have been immune to the problems in the preowned-car market, with the five stocks just about flat in 2022, on average. And at just six times 2023 earnings, they look pretty cheap too.

Sometimes, buying new really is the better deal.

Write to Al Root at allen.root@dowjones.com

Credit: marketwatch.com

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