Auto dealer stocks rally despite Wall Street's 'demand destruction' theory

Vehicles are displayed for sale at an AutoNation car dealership on April 21, 2022 in Valencia, California.

Mario Tama | Getty Images

DETROIT – Shares of AutoNation, Group 1 Automotive and other automotive dealers rallied Thursday following strong third-quarter earnings and optimistic outlooks regarding consumer demand for new vehicles.

The results and comments followed concerns by some Wall Street analysts that the industry could soon shift from an inventory supply problem to a lack of demand, or “demand destruction,” situation with interest rates rising, inflation at record highs and recession fears looming.

“Clearly, there is some normalization that’s going to occur and has occurred,” Group 1 CEO Earl Hesterberg told investors after the company beat Wall Street’s expectations on Wednesday. “But we don’t have any big trepidation about next year … our core businesses such as aftersales and new vehicle sales are moving to remain strong in the near-term.”

Shares of AutoNation were up by as much as 8.2% after the company beat Wall Street’s estimates on Thursday. Stocks of others such as Group 1 Automotive and Penske Automotive that reported third quarter results on Wednesday were up by more than 6% during intraday trading on Thursday.

Hesterberg’s optimistic comments echoed those of other executives, who signaled supply chain problems are likely to keep new vehicle inventories tight for the foreseeable future. Inventory levels of new vehicles during the third quarter increased but they remained historically low.

General Motors and Ford Motor this week also said they saw consumer demand holding strong during the third quarter, but warned they are closely watching outside economic factors and concerns for any changes.

“We haven’t seen any direct impact on our products. Pricing remains strong, demand remains strong for our products, but we can’t ignore what others are saying out there and what others are seeing out there,” GM CFO Paul Jacobson told reporters Tuesday after reporting strong third-quarter earnings.

Automakers and retailers believe they have better insights into consumer demand than they ever have before, as the companies have focused more on individual, customized retail orders, including customer reservations, rather than people buying vehicles off dealer lots.

The industry is coming down from record profits during the coronavirus pandemic, and is facing lower wholesale used car prices, slowing new vehicle price increases and other signs of broad normalizing on the heels of the pandemic and supply chain issues.

Vehicle sales for several dealership groups were in line with or lower than the third quarter of last year, which some said was due to continued production problems.

Also notably lower were average used vehicle gross profits per unit, or GPU. The average GPU – an important statistic for investors – for used vehicles largely declined double digits compared with a year earlier, including declines of more than 20% for Group 1 and AutoNation.

AutoNation CEO Mike Manley told investors Thursday that he expects “some mitigation in margins as we get middle-to-end of next year,” but demand is “still going to remain healthy.”

Group 1 said its order banks for new vehicles is at nearly 17,000 units, which represents a backlog of six months based on its 2022 sales pace. However, Lithia CEO Brian DeBoer last week said while demand remains strong, the company doesn’t “have the bigger backlogs that we used to have.”

The gains in dealer stocks on Thursday follows less optimistic comments from used car retailer CarMax as well as Lithia Motors, which is battling AutoNation this year for the title of nation’s largest dealer, missing Wall Street’s top and bottom-line expectations last week.

Here’s a look at how auto dealer stocks are performing on Thursday:

Auto dealer stocks

–CNBC’s Michael Bloom contributed to this report.

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