Carvana, dealer shows deflation risks. Ford, GM Investors Should Pay Attention.
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Why buy now if the price will be lower tomorrow?
That’s not a question US consumers have been asking themselves lately. Inflationary have had the opposite effect in recent months. But the price of the car is downward and that is creating a new problem for auto dealers, such as
Carvana
(code: CVNA). It will eventually affect others in the automotive value chain.
Last week, the online car dealer reported The result was weaker than expected. Revenue came in at about $3.4 billion, well below the $3.7 billion Wall Street was expecting. Total number of cars sold 102.570down from 117,564 in Q2 2022 and down 8% from Q3 2021.
Shares fell 39% after the profit. Shares fell 16% Monday, bringing their losses so far this year to about 97%.
Management says demand for cars has cooled as interest rates rise, increasing the monthly cost of any vehicle purchased with financing. Both weaker demand and higher borrowing costs are weighing on used car prices, which is also adversely affecting
Carvana
and other auto dealers.
“Not good timing for a headwind,” writes analyst Benchmark. Mike Ward after the quarter of Carvana. He rates the stock at Hold and has no stock price target.
Ward pointed out that US used car sales fell more than 13% in the third quarter. “The sharp drop in market prices has created a headwind for used car retailers, and this trend is expected to continue into 2023,” he wrote.
When prices fall rapidly, consumers return, expecting a better deal tomorrow, which tends to put more pressure on prices as inventories grow. Other industries such as housing, which also rely on financing to facilitate purchases, are also facing the same problem.
In the automotive world, it’s not just a problem for used car dealers. Car rental companies like
Hertz Global
(HTZ) and auto lenders such as
Ally Financial
(ALLY) relies on future used-vehicle price estimates to manage things like capital expenditures and valuations. Fluctuations in used car prices can wreak havoc on their financial results.
Prices for used and new cars are also linked. If one side is too far away from the other, then buyers will turn their attention to the better value until things correct.
Good news for automakers like
Ford Motor
(F) and
Synthetic engine
(GM) thinks new car sales shouldn’t be affected so much. Output is inherently low as production is constrained by a shortage of spare parts. U.S. new car sales will reach about 13 million units in 2022, about three million less than in previous years.
New cars don’t pile up either. That shortage of spare parts has reduced the U.S. inventory of new cars to about half of normal levels.
Automakers still have to worry about the effects of price cuts, adding to the long list of challenges that industry investors must consider.
Ford
and GM stock is down 34% and 33% so far this year, worse than the roughly 21% and 10% declines in
and
Both stocks trade for less than seven times projected earnings per share for 2023, reflecting some investors’ worries about the car business and the broader economy.
Write to Al Root at [email protected]