The month of June witnessed a significant easing in used car prices, leading to a surge in the shares of used car dealers. According to the Manheim Used Vehicle Value Index, which serves as a key indicator of car prices, there was a remarkable 10.3% decline in June compared to the previous year. This marks the tenth consecutive month of annual declines and sets a record for the month of June, as reported by Cox Automotive, the entity that owns Manheim.
The index currently stands at about 17% lower than the peak levels recorded in January 2022. However, it still remains nearly 40% higher than the levels seen before the pandemic.
While lower prices may have both positive and negative implications for the auto sector, falling prices for used cars often result in reduced prices for new cars. This can potentially impact the profit margins of companies such as Ford Motor (ticker: F) and General Motors (GM). Additionally, declining prices may narrow the selling spreads for dealers, causing a potential decrease in the value of cars that have been sitting on their lots for an extended period.
Despite these challenges, lower prices also alleviate some of the pressure faced by consumers and can lead to increased car sales.
Consumers have been under significant financial strain, with a record-breaking percentage of new car buyers paying more than $1,000 per month for their vehicles in the second quarter. This highlights the immense financial burden placed on individuals. Consequently, new car sales are still hovering around 10% below the levels seen before the pandemic.
Investor Sentiment: Dealers vs. Auto Makers
Carvana (CVNA) stock soared by 16% on Monday, surpassing the gains of the broader market. Investors seem unfazed by the lower prices for dealerships, as they prioritize reduced consumer stress and the potential for higher sales volumes. The S&P 500 and Nasdaq Composite both posted more modest gains of 0.2%.
Other dealership stocks also experienced an upward trajectory. CarMax (KMX) saw a 1.6% increase, while Lithia Motors (LAD) showed a 0.7% rise.
Carvana’s stock gains could be attributed to the fact that it has faced more significant blows than most other dealerships, suffering a decline of over 90% from its peak levels in 2021. Notably, the company declared on Monday that its total sales of electric vehicles (EVs) had surged by an astounding 786% over the past five years.
To provide an illustration, let’s suppose that Carvana sold 100 EVs per month five years ago. Today, they are estimated to be selling approximately 828 EVs per month. However, Carvana did not disclose the specific number of EVs sold, but it did highlight that it sold its first Tesla (TSLA) vehicle back in 2014.
Contrarily, the news isn’t quite as optimistic for auto manufacturers. Ford and GM shares saw modest increases of 0.6% and 0.1%, respectively. Investors appear to be navigating the trade-off between increased sales volume resulting from lower prices and the potential for diminished profits per car sold.
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