Over a six-week period in early 2020, AutoCanada’s shares declined by 67 per cent to hit their lowest level in more than eight years.BRIAN SNYDER
So much for beating the Street.
After posting third-quarter earnings ahead of analysts’ forecasts, AutoCanada Inc.’s shares promptly fell off a cliff.
Over the past six trading days, the Edmonton-based car dealership group saw its stock lose 23 per cent, as investor attitudes toward the entire auto retail space seemed to sour.
“The market was pricing in really strong growth coming out of the pandemic,” said Ryan Bushell, president and portfolio manager of Toronto-based Newhaven Asset Management. “People are now looking at this quarter as possibly the peak in earnings.”
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The pullback seemed to catch some of the analysts following AutoCanada by surprise. Extraordinary demand for new and used cars in the face of supply constraints has sent car prices soaring, and auto dealer profits along with them. Some investors have recently voiced concerns that a return to more normal profitability will start soon, if it hasn’t already.
“We believe the narrative of ‘peak margin/earnings’ gets way too much airtime, and distracts from the real story, which is that the auto retail market will be a good place to be for at least another 18 to 36 months,” Stifel GMP head of research Maggie MacDougall wrote in a note to investors.
The pandemic has proved to be a great time to sell cars. This would have been difficult to imagine a year-and-a-half ago, when a huge chunk of the economy shut down.
With commuters having vanished from the roads, and economists bracing for a depression-level economic shock, the prospects for the auto sector appeared grim.
Dealership groups became prime targets in the broader stock market crash. Over a six-week period in early 2020, AutoCanada’s shares declined by 67 per cent to hit their lowest level in more than eight years.
Then came an economic comeback for the history books, fuelled by a vast supply of government stimulus. Many households found themselves flush with cash, unable to fly and eager to hit the road.
But the industry has struggled to keep up with burgeoning demand for vehicles. Production constraints related to COVID-19 restrictions, a gummed-up global supply chain and a persistent shortage of semiconductor chips have decimated new car inventories and sent prices skyward.
This has led to intense competition for used cars, which are now 31 per cent more expensive in Canada than a year ago, according to a recent survey by the website CarGurus.
Inflated prices have generated blockbuster profits for auto dealers, making the segment a star performer of the pandemic. The share price of AutoNation Inc., the largest U.S. dealer of new cars, rose by 480 per cent from the pandemic low to its peak in late October. Penske Automotive Group Inc. increased by about 430 per cent over the same period.
AutoCanada’s stock seemed to get swept up in the same trade, rising by more than 1,100 per cent from trough to peak. “I can’t believe it got to where it did,” Mr. Bushell at Newhaven said. “It was working from a momentum perspective and some U.S. players got in the stock.”
The boom time for auto dealers has come even as they have struggled to secure enough supply of new cars. AutoCanada’s most recent quarter, for example, saw new vehicle sales decline by 10 per cent while revenue from used cars rose by 71 per cent over the prior year.
“Our new vehicle inventory continues to be a challenge, but it is still manageable,” AutoCanada president Michael Rawluk said in a call with analysts last week. “The situation varies among the OEMs [original equipment manufacturers], but the common theme is that production has hit bottom and is slowly improving.”
Investors, however, will be keeping a close eye on new car supply. “Given the escalating chip shortage situation at present, we believe this would be increasingly at play in coming quarters,” National Bank Financial analyst Maxim Sytchev wrote in a report.
Also at play will be the persistent supply-demand imbalance in the auto sector, which is likely to keep market dynamics strong at least through the end of next year, Ms. MacDougall noted.
“The pullback … provides a great entry point,” she said.
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