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Why CarMax, AutoNation, and LKQ Corp. Are Plunging More Than 20%

By Daniel Miller - Mar 18, 2020 at 6:03PM

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COVID-19 is sending a ripple through the global automotive market.

What happened

Shares of CarMax (KMX 2.42%), AutoNation (AN 2.73%), and LKQ Corporation (LKQ 0.92%) are down 23%, 20%, and 24% respectively, on yet another brutal day in the markets as investors realize potential economic impacts from COVID-19 on the global economy and healthcare systems.

So what

^SPX Chart

^SPX data by YCharts.

COVID-19 and its impact continue to expand. One area being hit hard is the automotive industry which, as you can see in the graph above, has been in a steep downward spiral amid the broader markets' decline. RBC Capital Markets estimates that the novel coronavirus and its negative impact could send global auto production 16% lower, and sales 20% lower. North America is the world's most lucrative and profitable automotive market while China is the largest by volume, and the slowing sales ripple will be felt across the global automotive industry.

Manufacturers such as Ford (F 1.71%) and General Motors (GM 1.35%) said they would close all manufacturing sites in the U.S., Canada, and Mexico until at least March 30, a costly step their management teams would have preferred to avoid. That ripple effect will be felt from parts suppliers to manufacturers, including suppliers such as LKQ Corporation, which sells parts to collision and mechanical businesses, among other services. In addition, LKQ already noted that its Italy exposure could drop its earnings by 3% alone as discretionary miles driven, and the demand for replacement parts, decline.

Rows of cars at a vehicle dealership

Image source: Getty Images.

It could be argued that dealerships and retailers such as CarMax and AutoNation -- the former being the largest used car retailer in the U.S., and the latter the largest overall automotive retailer -- will feel more of an impact: They will have aging inventories with production slowed, lower foot traffic, and cautious consumers less likely to spend on big-ticket items. Already CarMax has closed five dealerships in California until April 7, but the majority of its nationwide stores remain open for now.

Now what

Dealerships and automakers do have some ammunition to battle COVID-19 impacts. They could offer new buyers the option to defer payments, or offer existing customers payment rescheduling or payment relief in the event they lose their jobs. Many automakers and retailers are implementing such plans.

Yet COVID-19 will negatively impact the automotive industry at a time the North American market was already slowing, the evolution of ridesharing and smart mobility was disrupting the industry, and an expensive switch to developing electrified vehicle lineups was happening. Investing in the automotive industry comes with uncertainty and challenges.

It's easy to be gloomy about automotive stocks, but investors would be wise to take a long-term view, and realize that history has taught us the markets will rebound after these scary, and hopefully short-term, developments. The decline of stock markets is an opportunity for savvy investors to identify solid businesses being sold off and to grab shares at a discount.

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Stocks Mentioned

AutoNation, Inc. Stock Quote
AutoNation, Inc.
$114.81 (2.73%) $3.05
CarMax Inc. Stock Quote
CarMax Inc.
$92.67 (2.42%) $2.19
LKQ Corporation Stock Quote
LKQ Corporation
$49.54 (0.92%) $0.45
Ford Motor Company Stock Quote
Ford Motor Company
$11.32 (1.71%) $0.19
General Motors Company Stock Quote
General Motors Company
$32.19 (1.35%) $0.43

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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