Cars.com Inc (NYSE: CARS)
Chicago based Cars.com Inc has seen a surge in car sales throughout 2020, finding itself on the right side of the pandemic inflicted stock divide. Time will tell whether this will continue, The Cars.com share price has made a decent recovery since the March market crash, with a 154% rise. But unlike the hot stocks of 2020 that have overshot their 2019 stock prices, the Cars.com share price is still down 26% year-to-date.
The company is a leading digital marketplace where buyers can search and shop directly for their ideal vehicle from a sea of automotive sellers. Research conducted by Cars.com indicates a surge in buying cars delivered directly to the consumer’s home. This is most certainly driven by a reluctance to take unnecessary risk in visiting dealerships in light of the pandemic. Of the recent car buyers surveyed, 61% stated they’d like their car delivered, rather than collecting it from their local dealership. In response, car home delivery services from local dealerships have increased by 35% since March. Increased home deliveries by brand include: Land Rover (NYSE:TTM), Mitsubishi, Lincoln, Mercedes-Benz (OTCPK:DDAIF) Volvo (OTCPK:VOLVY), Nissan (OTCPK:NSANY), Infiniti, Cadillac (NYSE:GM), Acura (NYSE:HMC), and Buick.
Buying cars digitally has the highest uptake in New York at 81%, next is Los Angeles at 73% followed by Chicago at 65%, closely followed by Atlanta with 64% and Dallas at 63%.
With many people stuck at home, unable to drive, it’s natural to presume car sales would suffer. But, surprisingly for everyone, particularly auto traders, vehicle sales have surged in recent months. Perhaps people have had time to shop for their ideal vehicle, they’ve had extra money in their pockets, thanks to less recreational spending and of course additional government stimulus. But also, travelling in personal vehicles is seen as a much safer alternative to public transport while the virus continues to threaten our lives. Recent research from Motors.co.uk states that 28% of consumers would like to buy a car simply to avoid public transport, rising to 36% for women with children at home.
Revenue growth ahead
In a preliminary earnings report last week, Cars.com stated order cancellation rates had fallen substantially, while net growth improved. Thanks to this it now expects its Q3 revenue to be between $142 million and $144 million. Prior to the announcement, FactSet had pitched its consensus revenue at around $141.7 million, so the upbeat outlook exceeded expectations. This led at least two analysts to raise their share price targets and the Cars.com share price shot up over 20% the next day, as trading volume ballooned.
“The digital car-buying market has strengthened, and dealer customers are further leveraging our unique digital solutions to drive profitable sales“said Chief Executive Alex Vetter.
The digital world is a normal world for Millennials and Generation Z, so, buying a car online is not as daunting as it may be for those coming from the old school purchase path of several visits to the car lots and intense discussions with salesmen. They’re comfortable using email and online chat facilities to facilitate a deal.
The company reported higher EBITDA (essentially net income (or earnings) with interest, taxes, depreciation, and amortization added back) for the first time in four years, adjusting its EBITDA margin from 33% to 34%. It also has 20% free cash flow. In Q3 it increased its number of dealers listed on the site by 100, which is encouraging for the company. Overall it’s on a mission to reduce debt and improve its capital structure (it paid-down debt by $48 million in this quarter). Due to a $31 million non cash charge, it expects a net loss of between $10 million to $12 million. This charge is for the correction of an error recorded in Q1 of 2020.
Looking ahead, the company plans to continue investing in the business, with increased marketing and some additional recruitment, driving growth in the months ahead. In July Cars.com stated it thinks the digital shift, driven by the pandemic, will advance the industry and change car buying and selling for the better.
Staycations are boosting motorhome popularity
The automotive industry is benefiting from the pandemic in ways unimagined when the lockdowns first took hold and threatened to decimate the trade. In addition to ordinary vehicles, motorhomes and RV sales and rentals have also skyrocketed, both in the US and UK and probably elsewhere in the world too.
As initial lockdown restrictions were gradually lifted, people swarmed to the great outdoors, opting for staycations rather than international or interstate travel. Perhaps the boredom and claustrophobic sense of impending doom, helped encourage a sense of adventure as campervan sales and rentals have seen enquiries and sales surge. The roads and car parks have been packed with them, bucking a trend that is also benefiting Airbnb properties and rural house sales.
With travel restrictions remaining complex and staying at home encouraged, citizens on both sides of the pond are looking to motorhomes as the ultimate home-away-from-home experience.
Competition and rising demand in used-car sales
Cars.com is no stranger to mergers and acquisitions (M&A) having previously purchased DealerRater® and Dealer Inspire®. The full suite of its properties also includes Cars.com™, FUEL™, Auto.com™, PickupTrucks.com™ and NewCars.com®.
A main US competitor of Cars.com is CarGurus, while Carvana and Vroom deal directly with the consumer, eliminating the dealer entirely. In the UK, that’s what Auto Trader Group (LON:AUTO), eBay Inc (NASDAQ: EBAY) owned Gumtree and now Cinch are doing. Increasing unemployment prospects and economic uncertainty are reducing demand for new cars and encouraging used-car sales.
In the UK, Cars.com’s main equivalents are Auto Trader and Gumtree, which previously acquired Motors.co.uk. British Car Auctions (BCA) is another competitor. BCA owns the WeBuyAnyCar platform, as well as used-car classifieds website Cinch which is now promising home delivery and a 14-day money back guarantee. This is direct-to-consumer without the middleman. The world of car sales has become a cut-throat and complex web, with Cinch now competing with some of its owner’s (BCA) own retail customers.
Looking to the future
September saw used-car sales speed up year-on-year in the UK market, but stock shortages could be a concern going forward. In the interim, this is boosting prices, which EBay Motors recently confirmed. It reports a 1.8% month-on-month rise in September with a 2% rise for franchised dealer prices. This relates to the top 50 leading makes and models.
Despite some franchises seeing an uptick in September sales and used-car sales being on the increase, overall new car sales volumes in the UK fell by 4.4% year-on-year. There’s a marked decline in sales of new diesel cars, but many are no longer being manufactured in order to meet carbon emissions targets. Nevertheless, sales of used diesel cars slightly exceeded that of used petrol cars in September.
All-in-all it seems as if used car purchases are likely to continue to trend higher as long as the pandemic prevails, but in the longer term the wider economy will determine how profitable these car businesses continue to be. As a leader in its field, Cars.com appears to be in a position of strength for now, as do Auto Trader and eBay.