Zacks Industry Outlook Lithia Motors and Rush Enterprises

The outlook for the Zacks Auto Retail and Wholesale industry is muted now amid concerns over slowing vehicle sales growth. While consumer incentives offer some relief, they also squeeze retailers' profit margins. Adding to the pressure, uncertainty surrounding EV policies under Donald Trump's presidency may further dampen sales. Despite these complex challenges, auto retailers like Lithia Motors LAD and Rush Enterprises RUSHA appear well-prepared, leveraging strategic expansions and shareholder-focused initiatives to better navigate the industry headwinds.

Industry Overview

The automotive sector’s performance depends on its retail and wholesale network. Through dealership and retail chains, companies in the Zacks Auto Retail and Whole Sales industry carry out several tasks. These include the sale of new and used vehicles, light trucks as well as auto parts, execution of repair and maintenance services, along with the arrangement of vehicle financing. The industry, being consumer cyclical, is dependent on business cycles and economic conditions. Consumers and businesses spend more on big-ticket items when they have higher disposable income. On the contrary, when income is tight, discretionary expenses are the first to be slashed. Importantly, the coronavirus pandemic has brought considerable changes in the operating environment, with the industry laying more emphasis on e-commerce retailing.

Key Investing Themes to Consider

Vehicle Sales Slowing Down: New vehicle sales in the United States declined by about 2% year over year in the third quarter of 2023, marking the second straight quarterly drop, per U.S. Automotive News. Industry experts expect ongoing volatility through year-end. North American light-vehicle production forecasts have been reduced from 15.8 million to 15.5 million units due to delayed launches and production cuts aimed at controlling inventory. Additionally, S&P Global Mobility lowered its 2024 U.S. sales forecast from 16 million to 15.9 million vehicles. Cox Automotive forecasts new vehicle sales of 15.7 million. This slowdown in sales poses challenges for auto retailers, who may face pressure amid reduced demand.

EV Uncertainty on the Horizon: A Trump win is set to impact U.S. EV sales demand, posing new challenges for auto retailers. His stance on loosening environmental regulations and scaling back EV incentives is expected to slow the EV market’s momentum, especially if subsidies and tax breaks are reduced or removed. Lower EV sales could push manufacturers to adjust production, potentially leading to fewer model choices and reduced innovation in EVs. Lower-than-expected consumer adoption of EVs will reduce the overall sales volumes.

Vehicle Margins Under Pressure: Vehicle margins are shrinking as inventories rise, reaching 2.8 million units in September — a 40% increase from a year ago, per Cox Automotive. As a result, automakers and dealers have ramped up incentives, with the average incentive per new vehicle soaring 63% year over year to $3,000, according to J.D. Power and GlobalData. Incentives now account for 6.2% of the sticker price, up from 3.8% last year, signaling a shift to a buyer's market. Transaction prices averaged $44,467 in September, down 2.8% from a year ago, as higher manufacturer incentives and retailer discounts put pressure on prices. While consumers benefit, auto retailers face tighter margins amid aggressive discounts.

Investor-Friendly Moves: Despite broader market challenges, many auto retailers still remain committed to delivering shareholder value through share buybacks and dividend increases. Benefiting from acquisitions, store expansions and cost-saving measures, these companies are generating decent cash flows, enabling them to reward investors with share repurchases and dividend growth.

Zacks Industry Rank Paints a Glum Picture

The Zacks Auto Retail & Whole Sales industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #227, which places it in the bottom 9% of around 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates glum near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2024 and 2025 have contracted around 17.30% and 33.20%, respectively, over the past year.

Before we present a few stocks that you may still add to your watchlist, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags S&P 500 but Tops Sector

The Zacks Auto Retail & Whole Sales industry has underperformed the Zacks S&P 500 composite but outperformed the Auto, Tires and Truck sector over the past year. The industry has gained 18.8% over this period compared with the S&P 500’s growth of 33.7%. Meanwhile, the sector has risen 15%.

One-Year Price Performance

Industry's Current Valuation

Since automotive companies are debt-laden, it makes sense to value them based on the enterprise value/earnings before interest tax depreciation and amortization (EV/EBITDA) ratio.

On the basis of the trailing 12-month EV/EBITDA, the industry is currently trading at 8.81X compared with the S&P 500’s 18.59X and the sector’s trailing 12-month EV/EBITDA of 18.56X.

Over the past five years, the industry has traded as high as 10.71X, as low as 4.35X and at a median of 6.92X, as the chart below shows.

EV/EBITDA Ratio (Past 5 Years)

2 Stocks Worth a Look

Rush Enterprises: It is a leading provider of solutions to the commercial vehicle industry. The company is known for the ownership and operation of Rush Truck Centers, the largest network of commercial vehicle dealerships across North America. With over 150 locations spanning 23 states and Ontario, Canada, including 125 franchised dealership locations, Rush is a dominant force in the industry. Strong FCF generation, disciplined expense management approach and investor-friendly moves are praiseworthy. Rush Enterprises has increased its payout seven times in the last five years, with an average annualized growth rate of 26.8%.

Rush Enterprises has a Zacks Rank #2 (Buy) and a VGM Score of A. The Zacks Consensus Estimate for 2025 EPS has moved north by 7 cents in the past 90 days to $4.08, implying 18.3% growth from the 2024 projected level. RUSHA surpassed estimates in the trailing four quarters, the average being 12.8%. Over the past six months, shares of RUSHA have gained 38.7%, outperforming the industry’s growth of 13.3%.

Price & Consensus: RUSHA

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lithia:It is one of the leading automotive retailers of new and used vehicles, and related services in the United States. The company’s strategic acquisitions are significantly increasing its market share and enhancing its portfolio. A spree of acquisitions has brought Lithia's total expected annualized revenues acquired to roughly $6 billion so far in 2024. LAD’s Driveway e-commerce platform is boosting Lithia’s profitability and market presence. Robust cash flows and investor-friendly moves of the firm are driving shareholders’ confidence. LAD has a five-year annualized dividend growth rate of 15.13%. In the first nine months of 2024, the company repurchased approximately 986,000 shares.

Lithia currently carries a Zacks Rank #3 (Hold) and has a VGM Score of A. The Zacks Consensus Estimate for 2025 EPS and sales indicates year-over-year growth of 15.7% and 8%, respectively. The consensus mark for this year’s EPS has moved north by 10 cents over the past seven days. Over the past six months, shares of LAD have gained 34.8%, outperforming the industry’s growth of 13.3%.

Price & Consensus: LAD

Zacks Investment Research

If you're interested in broad exposure to the Mid Cap Value segment of the US equity market, look no further than the Invesco S&P MidCap Value with Momentum ETF (XMVM), a passively managed exchange traded fund launched on 03/03/2005.

The fund is sponsored by Invesco. It has amassed assets over $280.53 million, making it one of the smaller ETFs attempting to match the Mid Cap Value segment of the US equity market.

Why Mid Cap Value

Compared to large and small cap companies, mid cap businesses tend to have higher growth prospects and are less volatile, respectively, with market capitalization between $2 billion and $10 billion. Thus they have a nice balance of growth potential and stability.

Value stocks are known for their lower than average price-to-earnings and price-to-book ratios, but investors should also note their lower than average sales and earnings growth rates. While value stocks have outperformed growth stocks in nearly all markets when you consider long-term performance, growth stocks are more likely to outpace value stocks in strong bull markets.

Costs

Since cheaper funds tend to produce better results than more expensive funds, assuming all other factors remain equal, it is important for investors to pay attention to an ETF's expense ratio.

Annual operating expenses for this ETF are 0.39%, making it one of the more expensive products in the space.

It has a 12-month trailing dividend yield of 1.26%.

Sector Exposure and Top Holdings

Even though ETFs offer diversified exposure that minimizes single stock risk, investors should also look at the actual holdings inside the fund. Luckily, most ETFs are very transparent products that disclose their holdings on a daily basis.

This ETF has heaviest allocation to the Financials sector--about 37.10% of the portfolio. Consumer Discretionary and Energy round out the top three.

Looking at individual holdings, Lithia Motors Inc (LAD) accounts for about 2.72% of total assets, followed by Avnet Inc (AVT) and Arrow Electronics Inc (ARW).

The top 10 holdings account for about 19.82% of total assets under management.

Performance and Risk

XMVM seeks to match the performance of the S&P MIDCAP 400 HIGH MOMENTUM VALUE INDEX before fees and expenses. The S&P MidCap 400 High Momentum Value Index is composed of securities with strong value characteristics selected from the Russell Midcap Index.

The ETF has added about 20.98% so far this year and was up about 35.45% in the last one year (as of 11/07/2024). In the past 52-week period, it has traded between $43.85 and $60.33.

The ETF has a beta of 1.16 and standard deviation of 22.53% for the trailing three-year period. With about 82 holdings, it effectively diversifies company-specific risk.

Alternatives

Invesco S&P MidCap Value with Momentum ETF carries a Zacks ETF Rank of 3 (Hold), which is based on expected asset class return, expense ratio, and momentum, among other factors. Thus, XMVM is a reasonable option for those seeking exposure to the Style Box - Mid Cap Value area of the market. Investors might also want to consider some other ETF options in the space.

The iShares Russell Mid-Cap Value ETF (IWS) and the Vanguard Mid-Cap Value ETF (VOE) track a similar index. While iShares Russell Mid-Cap Value ETF has $13.93 billion in assets, Vanguard Mid-Cap Value ETF has $18.40 billion. IWS has an expense ratio of 0.23% and VOE charges 0.07%.

Bottom-Line

An increasingly popular option among retail and institutional investors, passively managed ETFs offer low costs, transparency, flexibility, and tax efficiency; they are also excellent vehicles for long term investors.

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

Zacks Investment Research

Momentum investing revolves around the idea of following a stock's recent trend in either direction. In the 'long' context, investors will be essentially be "buying high, but hoping to sell even higher." With this methodology, taking advantage of trends in a stock's price is key; once a stock establishes a course, it is more than likely to continue moving that way. The goal is that once a stock heads down a fixed path, it will lead to timely and profitable trades.

Even though momentum is a popular stock characteristic, it can be tough to define. Debate surrounding which are the best and worst metrics to focus on is lengthy, but the Zacks Momentum Style Score, part of the Zacks Style Scores, helps address this issue for us.

Below, we take a look at Rush Enterprises (RUSHA), which currently has a Momentum Style Score of B. We also discuss some of the main drivers of the Momentum Style Score, like price change and earnings estimate revisions.

It's also important to note that Style Scores work as a complement to the Zacks Rank, our stock rating system that has an impressive track record of outperformance. Rush Enterprises currently has a Zacks Rank of #2 (Buy). Our research shows that stocks rated Zacks Rank #1 (Strong Buy) and #2 (Buy) and Style Scores of A or B outperform the market over the following one-month period.

You can see the current list of Zacks #1 Rank Stocks here

Set to Beat the Market?

In order to see if RUSHA is a promising momentum pick, let's examine some Momentum Style elements to see if this commercial vehicle dealership operator holds up.

A good momentum benchmark for a stock is to look at its short-term price activity, as this can reflect both current interest and if buyers or sellers currently have the upper hand. It is also useful to compare a security to its industry, as this can help investors pinpoint the top companies in a particular area.

For RUSHA, shares are up 7.38% over the past week while the Zacks Automotive - Retail and Whole Sales industry is up 0.42% over the same time period. Shares are looking quite well from a longer time frame too, as the monthly price change of 14.81% compares favorably with the industry's 2.69% performance as well.

While any stock can see its price increase, it takes a real winner to consistently beat the market. That is why looking at longer term price metrics -- such as performance over the past three months or year -- can be useful as well. Over the past quarter, shares of Rush Enterprises have risen 14.65%, and are up 51.72% in the last year. On the other hand, the S&P 500 has only moved 7.29% and 32.85%, respectively.

Investors should also take note of RUSHA's average 20-day trading volume. Volume is a useful item in many ways, and the 20-day average establishes a good price-to-volume baseline; a rising stock with above average volume is generally a bullish sign, whereas a declining stock on above average volume is typically bearish. Right now, RUSHA is averaging 350,293 shares for the last 20 days.

Earnings Outlook

The Zacks Momentum Style Score also takes into account trends in estimate revisions, in addition to price changes. Please note that estimate revision trends remain at the core of Zacks Rank as well. A nice path here can help show promise, and we have recently been seeing that with RUSHA.

Over the past two months, 1 earnings estimate moved higher compared to none lower for the full year. These revisions helped boost RUSHA's consensus estimate, increasing from $3.44 to $3.45 in the past 60 days. Looking at the next fiscal year, 1 estimate has moved upwards while there have been no downward revisions in the same time period.

Bottom Line

Given these factors, it shouldn't be surprising that RUSHA is a #2 (Buy) stock and boasts a Momentum Score of B. If you're looking for a fresh pick that's set to soar in the near-term, make sure to keep Rush Enterprises on your short list.

Zacks Investment Research

Most of us have heard the dictum "the trend is your friend." And this is undeniably the key to success when it comes to short-term investing or trading. But it isn't easy to ensure the sustainability of a trend and profit from it.

Often, the direction of a stock's price movement reverses quickly after taking a position in it, making investors incur a short-term capital loss. So, it's important to ensure that there are enough factors -- such as sound fundamentals, positive earnings estimate revisions, etc. -- that could keep the momentum in the stock going.

Our "Recent Price Strength" screen, which is created on a unique short-term trading strategy, could be pretty useful in this regard. This predefined screen makes it really easy to shortlist the stocks that have enough fundamental strength to maintain their recent uptrend. Also, the screen passes only the stocks that are trading in the upper portion of their 52-week high-low range, which is usually an indicator of bullishness.

There are several stocks that passed through the screen and

Rush Enterprises

(RUSHA) is one of them. Here are the key reasons why this stock is a solid choice for "trend" investing.

A solid price increase over a period of 12 weeks reflects investors' continued willingness to pay more for the potential upside in a stock. RUSHA is quite a good fit in this regard, gaining 13.4% over this period.

However, it's not enough to look at the price change for around three months, as it doesn't reflect any trend reversal that might have happened in a shorter time frame. It's important for a potential winner to maintain the price trend. A price increase of 14% over the past four weeks ensures that the trend is still in place for the stock of this commercial vehicle dealership operator.

Moreover, RUSHA is currently trading at 87.2% of its 52-week High-Low Range, hinting that it can be on the verge of a breakout.

Looking at the fundamentals, the stock currently carries a Zacks Rank #2 (Buy), which means it is in the top 20% of more than the 4,000 stocks that we rank based on trends in earnings estimate revisions and EPS surprises -- the key factors that impact a stock's near-term price movements.

The Zacks Rank stock-rating system, which uses four factors related to earnings estimates to classify stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), has an impressive externally-audited track record, with Zacks Rank #1 stocks generating an average annual return of +25% since 1988. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here

Another factor that confirms the company's fundamental strength is its Average Broker Recommendation of #1 (Strong Buy). This indicates that the brokerage community is highly optimistic about the stock's near-term price performance.

So, the price trend in RUSHA may not reverse anytime soon.

In addition to RUSHA, there are several other stocks that currently pass through our "Recent Price Strength" screen. You may consider investing in them and start looking for the newest stocks that fit these criteria.

This is not the only screen that could help you find your next winning stock pick. Based on your personal investing style, you may choose from over 45 Zacks Premium Screens that are strategically created to beat the market.

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Zacks Investment Research