Yahoo Finance Live's Brian Sozzi discusses what the state of the used car industry means for auto retailer stocks.
JULIE HYMAN: CarMax reported a big earnings miss earlier last week, as vehicle sales fell short of estimates. And that ugly report sheds light on how rising interest rates are beginning to hurt the used-car mac-- market. That's where we find Sozzi's Take for today. Those financing costs are going up.
BRIAN SOZZI: Yeah, and in some cases, they're just absolutely shocking. But you know, of course, it was almost a week ago, we got that CarMax report. And the stock was absolutely slaughtered. I just don't want folks to forget about that, because we're going into earnings season coming up, we're gonna get results from a Carvana and an AutoNation, and that CarMax report, I think, was very disturbing.
So let's pull some stats here. And we're getting a lot of weakness in the used-car market. And a lot of this data comes from Manheim, noting that wholesale used vehicle prices fell 2.3% from August in the first 15 days of September. So prices are really starting to come down here, as I think a lot of would-be buyers are balking at some of the interest rates they're getting on these loans. In many cases, above 7%.
Price declines, according to the Manheim index, the steepest in full size and sports car-- in sports cars. Some of the higher-- so some of the higher-priced offerings here. And we have that Manheim chart, too.
Now, of course, we saw a big spike in used-car vehicle prices around the pandemic, as everybody needed a car. They wanted a car. They were out there traveling more. They were doing staycations or just staying home. Now, they've also-- then they also, when they start to return to the office, they went out there and bought cars. They didn't take public transportation. But now, all those dynamics, I would argue, are no longer in play at the extent they were. Now, we're seeing prices come down, alongside of a slowing economy.
Now, the losers from this slowdown in the used-vehicle market are some of the names you see on the screen. Of course, CarMax with its very ugly report. AutoNation is pretty much the same as CarMax, in terms of business model. Carvana, an online-focused retailer of used vehicles. And then you have Hertz and Avis.
Now, why did I include them in here? Because you know, a lot of times their stocks trade off the perceived value of the inventory, or the car inventory, that Hertz and Avis own. So if those car prices are coming down, that's less of a valuation-- or less value assigned to the Hertz and Avis Budget rental fleets or their inventories.
Overall-- a good quote here, too, I'll just add, too, from Adam Jonas at Morgan Stanley. Noting, CarMax might be first on in feeling the impact of the used-car decline. But we expect the entire retail, auto retail franchise and auto credit complex, to follow. So something to keep in mind from Adam.
My take is this, auto retail stocks are probably dead money for right now. I know I look very happy there. I'm getting ready to go out for a cruise with my sunglasses on. But still, it's going to be hard to find positive catalysts for some of these names in the coming months.
BRAD SMITH: You know, it's really interesting on-- and especially the used-car side, when we think about the rental parts of that business that you mentioned, too.
I almost bought my first car from Enterprise, actually, because I had known-- and there are a lot of people out there that take advantage of this after they do find out that a Hertz, that an Avis, that an Enterprise, that they actually do sell used cars because sometimes they're just trying to work through old inventory that they have in order to get newer vehicles that are going to be able to be rented out and have better maintenance cycles over a longer period of time, knowing how many times those keys are changing hands, too.
BRIAN SOZZI: Did you buy it?
BRAD SMITH: I didn't.
BRIAN SOZZI: You buy it?
BRAD SMITH: No. No.
BRIAN SOZZI: How many miles did it have like 300,000?
BRAD SMITH: They have a lot of them a lot of miles on them
BRIAN SOZZI: [LAUGHS] A lot of miles.
BRAD SMITH: Yeah, I mean, some of them as low as, what, 18,000 miles? And then some of them you're getting up into the hundreds of thousands. 100,000 miles, you're like, eh, I don't need that.
BRIAN SOZZI: No, maybe not.
BRAD SMITH: Yeah.