There has been a lot of discussion about the adverse economic factors that have pounded the markets, auto stocks included, in 2022 – perhaps too much discussion.

Yes, the S&P 500 is down nearly 21%, and the NASDAQ is down 35%, but investors can still find good deals. J.P. Morgan analyst Ryan Brinkman has been sifting through the automotive industry companies and has discovered many worth investigating.

So let us do exactly that. We know that the auto industry faces unique challenges, such as the persistent microchip shortage and raw material price inflation, which are driving up prices.

However, supply chain concerns are improving and are likely to improve further in 2023.

There are some glimmers of normalization, with prices finally lowering somewhat, albeit conditions remain far from normal,” writes Brinkman in his general remarks on the market.

The wildcard in 2023 is an economic slowdown, which has the potential to cause a quick improvement in the volume environment and a more rapid normalization in price.

Brinkman’s colleagues at JPM are forecasting a 2.5% to 5% price moderation in new vehicles and a 10% to 20% price moderation in used vehicles through the calendar year 2023.

In terms of investor positioning, Brinkman is targeting two auto-related companies for one-year returns of more than 60%.

Let’s look at these two recommendations utilizing the most recent data as well as the analyst’s remarks to get a sense of their potential.

Kar Auctioneers, Inc. (KAR)

First up is KAR Auction, a global leader in the used car auction business.

The organization connects merchants and buyers in both the internet and physical worlds, and its customer base includes both enterprises and individual customers.

KAR provides vehicles for a wide range of applications, from commercial fleets to private travel to the used auto parts industry.

In 2019, prior to the epidemic, KAR sold 3.7 million vehicles and earned $2.8 billion in auction income.

The combination of, first, COVID, and second, excessive inflation, has pushed down KAR’s top line; the business projected $2.25 billion in total revenues for 2021, but revenue totals so far this year have not matched that.

The company recorded $393 million in revenue in the most recent quarter, 3Q22.

This was a year-over-year decrease of 26%, but a sequential improvement, which the business ascribed to an increase in gross profit per vehicle sold and higher prices, which offset lower volumes.

KAR reported a $320 gross profit per vehicle sold, up 14% from the $280 reported in the previous year’s third quarter.

KAR also recorded a net profit, with adjusted net income for 3Q22 coming in at 9 cents per diluted share, indicating a favorable future.

This was a significant improvement above the 11-cent loss posted a year ago.

Ryan Brinkman covers this stock for JPMorgan Chase and lays out various reasons why the company has been able to endure the current market turmoil – and why it is expected to remain tall in the future.

KAR has a solid position in this market: it is the second-largest provider of entire automobile auction services,” he says.

As a result of the low working capital requirements and minimal competition, there are reasonable pricing and margins, as well as strong free cash flow.

We anticipate solid profit growth in the coming years, driven by a cyclical recovery in currently depressed commercial consignor volumes and the firm’s push into the digital Dealer-to-Dealer space, as well as continued cost containment and exploration of numerous adjacencies, including retail reconditioning.

Camping World Holdings, Inc. (CWH)

Next is Camping World Holdings, a specialty auto stock. This company specializes in recreational vehicles, selling new and old towed and motorized RVs, as well as supporting gear, accessories, and other associated products such as boating and water sports vessels and their equipment.

In a nutshell, Camping World Holdings unifies the world of outdoor recreation into a single sales room.

Camping World’s sales and revenues are predictable, with a high in the second quarter and a trough in the fourth quarter.

With that in mind, the company reported 3Q22 revenues of $1.9 billion, a 3% year-on-year decrease but a $100 million increase over the Street’s projection.

Used vehicle sales reached a new high of 14,460, a business record, and used vehicle income increased by more than 1% to $526 million.

In the third quarter, the company reported larger inventories for both new and used automobiles, totaling $1.6 billion, which was due to restocking new vehicles to normal levels as well as planned development in the used vehicle market. During the quarter, the company added eight new dealership sites.

The company’s bottom line suffered a significant decline.

Adjusted diluted EPS declined 45% year on year from $1.98 in 3Q21 to $1.07 in the most recent quarterly report.

Despite lower earnings, CWH has maintained its common stock dividend.

The company most recently declared a payment of 62.5 cents per share, due on December 29. At such pace, the dividend annualizes to $2.50 per common share and yields an impressive 11%, more than enough to outperform inflation and assure a real rate of return.

JPM’s Ryan Brinkman explains why he thinks this auto stock is worth owning.

Camping World’s much greater scale provides it with numerous advantages relative to its smaller competitors, including:

(1) gross margin-enhancing volume discounts

(2) more favorable terms with financiers

(3) the ability to offer consumers a wider assortment by tapping into the inventory available across its greater number of stores, and

(4) an informational advantage in terms of consumer demand and pricing in the marketplace,” –he writes.

In our opinion, combining the market’s fragmentation and the huge benefits given by scale provides ample opportunity to build value by further integrating the industry, and Camping World has historically been highly acquisitive.

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