Why ASX auto stocks have produced stellar returns, and what to expect next from the used car sector
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Despite macro challenges, the used car market in Australia has held up quite well over the last 12 months.
Earnings released last week by Carsales.com.au (ASX:CAR) – the local industry’s bellwether – showed that people are still buying used cars despite higher mortgage rates and inflation.
Carsales’s revenue rose by 18% from a year earlier to $942m, as CEO Cameron McIntyre told Stockhead that searches for used cars have been pretty consistent year on year.
“In tough times, people may decide to invest less in their next car, but they do still change cars,” he said.
Peter Warren (ASX:PWR), a brick and mortar dealer, also saw its revenue climb by 21% to over $2 billion.
PWR’s CEO, Mark Weaver, however conceded that his business is operating in a changing industry.
“We continue to be proactive in mitigating the challenges around cost inflation, higher interest rates, consumer spending and vehicle supply,” Weaver said.
The car market is a relatively simple beast, driven by supply and demand.
During Covid, the prices of used cars hit record highs on the back of surging demand for private vehicles and a shortage of supply of new vehicles.
People looking to buy new cars at the time were forced to look for near-new alternatives, pushing up the value of used cars.
But now, more than a year out of the pandemic, used car prices are starting to fall, with the average passenger car costing 4%-7% off their May 2022 peak.
“The macro picture has been super interesting,” said Glenn Harwood, co-founder of Motor Merchants.
Motor Merchants is a platform that helps car owners sell their used cars, and dealerships to value them. According to Harwood, 30% of all new car showrooms in Australia use its services.
“Coming out of Covid, there were huge new car shortages, which meant there was no discounting on new cars, and all of them were being sold for the full price or above.
“Supply has now increased, but it still isn’t meeting demand. So that’s what’s really driven the recent financial results of a lot of the car retailers,” Harwood said.
However, that story is starting to pivot, particularly in the last three to six months, as interest rates rose rapidly and consumer confidence waned.
“That means used car is now a preferred option rather than a new car.”
According to Harwood, this shift will put a downward pressure on new car prices, and in turn, push used car prices down from their record highs – which is what’s already happening now.
After having worked in car dealerships including Mercedes over the past decade, Harwood understands the frustrations customers have when buying a used car.
“Everyone thinks that car dealers know how to price a used car, and when they tell you your car is worth X, there’s some science going into it.
“But consumers would be horrified if they knew the conversation going on in the back room before they gave you a price,” Harwood said.
And that’s really the motivation for starting Motor Merchants, he said, to make tools for car dealers and help them correctly value used cars at competitive re-sale prices.
Since launching the platform in 2021, the Motor Merchants platform has already celebrated more than 1500 listings in June this year.
“We’re a venture capital backed B2B SaaS company, and we’ve taken investments from a few sovereign wealth funds over the years, including the Dubai and the Oman government from the Middle East,” said Harwood.
Meanwhile, results from major vehicle distributor Eagers Automotive (ASX:APE) on Thursday offered more optimism for investors in the auto sector.
Eagers delivered a strong first half, with revenue increasing by 14.3% versus last year to $4.8 billion. The company also said it was on track to exceed its FY23 revenue guidance.
“While moderating from the highs of first half of 2022, demand remains resilient and we expect demand to be broadly in line with supply across the industry for the full year,” noted Eagers.
Over the pond, New Zealand based Turners Automotive (ASX:TRA) said it was expecting FY24 to be another record profit result for the business.
Turners says the supply-constrained market in NZ will continue to benefit the company despite a high level of economic uncertainty in the country.
But, although people are still buying cars, it appears that not many are willing to spend money on accessories.
On Tuesday, auto accessories company ARB Corp (ASX:ARB) – which designs and manufactures 4WD motor vehicle accessories under the ARB brand – fell 4% after reporting a -3.4% drop in sales revenue and a 27.5% decline in profit after tax to $88.5m.
According to ARB, its export sales, which are mostly to the US, declined 8.7% for the year, as “export markets are impacted by challenging market dynamics”. The company however anticipates sales and profits to grow in the 2024 financial year.