Americans Are Driving Again. What That Means for Car Stocks. - Barron's

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As states slowly reopen, people are getting back behind the wheel. They’re going to work, the store, a restaurant or maybe even on vacation—all the things that would have felt normal just a few months ago. With miles driven now rising, investors should consider what the driving inflection means for the automotive value chain.

American driving tendencies, like some much about regular life, changed dramatically because of the pandemic. In March, miles driven dropped almost 19% from the year before, and 40% in April. That amounts to 163 billion fewer miles driven, according to the Federal Highway Administration.

The government data isn’t out for May, but things are starting to improve, says Guggenheim analyst Ali Faghri. “U.S. traffic volume/driving trends have rebounded meaningfully in recent weeks,” he wrote in a note last week. “While national traffic volume is still down ...the data is quickly normalizing as states reopen.”

What’s more, Faghri says traffic in China is now back above pre-Covid levels. That’s an encouraging data point for U.S. investors thinking about the shape of any economic recovery.

The Automotive Aftermarket

Faghri believes a rebound in driving is positive for several automotive aftermarket stocks under his coverage. He rates five auto-part sellers and salvagers Buy: Advance Auto Parts (ticker: AAP), Copart (CPRT), IAA (IAA), LKQ (LKQ) and O’Reilly Automotive (ORLY). “The stronger recovery in miles driven/traffic volume makes us increasingly more positive on the aftermarket names in our coverage—salvage auctions and auto parts retail specifically,” adds the analyst.

Automotive Insurance

Falling miles driven has actually benefited automotive insurers. With fewer people driving, there have been fewer accidents. Insurance claims fell faster than auto insurers gave money back to policyholders. That is creating a year of super-profits for auto insurers.

A return to driving isn’t something investors need to fear regarding auto insurance stocks. Sound underwriting and growth in the number of licensed drivers will determine the direction of stocks in the sector.

Credit Suisse analyst Michael Zaremski has a Buy rating on shares of Progressive (PGR), with an $85 price target on the stock. He explained to Barron’s that Progressive is improving its business mix by selling more auto and home insurance bundles and selling more policies with driving telematics as part of the policy.

Both are more profitable policies, according to the analyst. Telematics track how a person drives and can qualify them for discounts. Safe drivers, of course, tend to get in fewer accidents.

He rates Progressive peer Allstate (ALL) the equivalent of Sell, though. Zaremski doesn’t believe Allstate has the same opportunity to improve its business mix.

Auto Makers

With people back on roads they can shop for cars again. Light vehicles sold in the U.S. dropped roughly 35%, 48% and 29%, in March, April and May, respectively.

The slight improvement from April to May was enough for Goldman Sachs analyst Mark Delaney to upgrade shares of General Motors (GM) on Thursday evening. He now has a Buy rating on the shares and has a $36 price target for the stock.

Most of Wall Street agrees with Delaney. More than 80% of analysts covering GM stock rate shares Buy. The average Buy rating ratio for stocks in the Dow Jones Industrial Average is about 55%.

Auto Dealers

Shopping involves auto dealers too. And traditional auto dealer stocks such as AutoNation (AN) are still down about 16% this year, on average. That might be an opportunity for investors as well.

Online dealer Carvana (CVNA) shares are up about 20% year to date. Shares have likely benefited from stay-at-home trends. That’s a risk for Carvana bulls to consider as the country reopens.

Auto Parts

Auto parts suppliers including Aptiv (APTV), Lear (LEA) and BorgWarner (BWA) are in a similar situation as dealers and auto makers with share prices down about 20% year to date. Industry improvement gives investors a chance to find some winners and lowers in this area too.

Car Rental Companies

Car rental companies are more complicated. Hertz (HTZ), for instance, declared bankruptcy in May. But the rebound in used car pricing is one reason the stock is up, prompting the company to try to sell new equity. A stock offering in bankruptcy might be unprecedented—we think it is—but Barron’s can’t be sure.

Another rental car company, Avis Budget (CAR), hasn’t run into Hertz-level of difficulty, but shares are still down about 22% in 2020, worse than comparable returns for the Dow and S&P 500.

One complication for rental car firms is their sensitivity to used-car pricing. They buy and sell a lot of new and used cars to maintain attractive fleets. What’s more, travel declines have also punished rental car stocks. A lot of business is conducted at airports. Commercial air travel is still down more than 80% compared with year-ago periods.

Only two out of eight analysts covering Avis rate shares a Buy.

Tesla

Tesla (TSLA) and its stock weren’t included with the auto makers. It is worth more than the Detroit-3 combined. Shares are up about 120% this year. The stock, relative to its automotive peers, qualifies as its own sector.

No matter how you slice it, though, the automotive universe is huge, generating trillions in annual sales and employing millions of people. Any signs of improvement will be welcomed by industry participants and automotive investors.

Write to Al Root at allen.root@dowjones.com

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