Shares of Hertz Global Holdings (NYSE:HTZ), Avis Budget Group (NASDAQ:CAR), and Group 1 Automotive (NYSE:GPI) were all down more than 10% Thursday after weak first-quarter auto sales and commentary from a used-car retailer continued to weigh on the beaten-down sector.
As you can see in the graphic above, stocks across the automotive industry have been battered over the past month, with many shedding two to three times as much value as the S&P 500. Those stocks continued to spiral lower Thursday when major automakers reported weak first-quarter sales, and the nation's largest vehicle retailer, CarMax (NYSE:KMX), reported earnings and noted more pain was to come.
First-quarter sales of new vehicles confirmed what many feared: There would be a sudden and large negative effect on sales as COVID-19 keeps consumers away from showrooms. Furthermore, the pandemic sent jobless claims soaring over the past two weeks, adding job and wage uncertainty for consumers, leaving them less willing to make big-ticket purchases.
Automakers sold more than 17 million vehicles in the U.S. during 2019, and were expected to sell between 16.7 million to 17.1 million in 2020. But March's seasonally adjusted annual rate (SAAR) of sales plummeted to 11.35 million, according to Motor Intelligence, putting 2020's initial forecast in immediate jeopardy. J.P. Morgan analysts predict April SAAR could drop to a brutal level, between 6 million to 7 million.
It's doom and gloom for the automotive industry during the near term, as dealerships such as CarMax and Group 1 Automotive will suffer from a standstill in showroom foot traffic, as well as store closings and an aging vehicle inventory that will only become less fresh as manufacturers idle plants.
Rental companies such as Hertz and Avis will certainly suffer as people avoid traveling for work or vacation. CarMax even confirmed Thursday that since the first week of March, the coronavirus has caused sales to drop significantly.
While many investors and consumers have been staying home, the financial pain for many companies is just beginning. RBC Capital analyst Scot Ciccarelli believes the "peak pain" period will happen March through June, with some easing during the third and fourth quarters.
Investors should consider two points: Broader markets have proved they can bounce back from developments such as COVID-19, but not all companies are prepared to weather the storm. Before investing in stocks blindly with the hope of an eventual rebound, investors would be wise to check a company's long-term debt and near-term maturities, the balance sheet and liquidity, and whether the long-term growth story will be hurt. For companies well positioned to weather the storm, this is an opportunity for savvy investors to scoop up shares of strong companies with a long-term horizon.