When leading used car dealer CarMax (NYSE: KMX) cited increasing used car sales as a reason for a jump in its quarterly earnings, I sat up and took notice.
At a time when car manufacturers as a whole are having a tough time moving units, the secondhand car industry is operating under a different reality. In fact, it is one of those rare industries that is benefiting from the recession and consumer retrenching.
Looking good
The used car industry is witnessing surging sales volumes even as prices touch all-time highs. Manheim Auctions' Used Vehicles Value Index hit a 15-year record high last month, indicating surging average prices, and possibly more profits for the car dealers.
Automotive industry data provider TrueCar has forecast a 6.2% sequential increase in used car sales in June. Data provider Dataium reported a rapid gain in the share of used vehicles in online auto shopping, with a record of total inventory searches online.
What is working in the industry's favor?
The crisis in Japan has led to huge supply shortages of new cars, which has forced carmakers to raise prices and cut incentives. Sales for the big automakers saw steep declines last month. Those supply chain bottlenecks are expected to continue at least in the near future.
According to automotive data provider Edmunds, Toyota Motor (NYSE: TM) and Honda Motor (NYSE: HMC) may have to produce at around half-capacity in the coming months. This means tighter supplies of new cars and likely higher prices.
Moreover, incentives on new vehicles are touching lows, and may remain subdued, giving consumers another reason not to buy a new vehicle now. All this should translate into higher secondhand car sales.
The surge in used car sales is accompanied by rising prices, which hasn't seemed to deter consumers. Apart from economic factors stated earlier, a slowdown in lease sales by automakers like Ford Motor (NYSE: F) and General Motors (NYSE: GM) during the financial crisis has also led to fewer cars in the pre-owned market, contributing to higher prices.
Benefiting from the old
CarMax is among the companies benefiting from all this. Most players who are into used vehicles retailing are seeing increasing sales.
For instance, Lithia Motors' first-quarter used vehicle same-store sales rose 17% from the year-ago period. Similarly, Penske Automotive saw an improvement in its used-to-new ratio in its quarterly earnings this year, with its used car retail sales up by 18%. Another auto dealer, Auto Nation (NYSE: AN), also reported an increase in both volumes as well as prices for used cars in the first quarter of 2011, attributing it to a decline in new and off-lease vehicles.
As the economic recovery remains wobbly, tight-fisted consumers are either postponing purchases or going for cheaper options like used cars, making it a good time for these companies.
Taking advantage
Companies in the sector are upbeat about the situation. Penske is increasing its used car inventory, and feels its full range of used vehicles will help it tide over any short supply of new ones.
AutoNation is also revving up its used car business in the wake of higher demand.
General Motors also wants to make a quick buck from the surge in used car sales. In a recent deal with Sirius XM Radio, customers buying any manufacturer's used car from GM dealers will get a three-month subscription to Sirius' radio service. It clearly looks like a way of attracting customers toward pre-owned cars.
The Foolish bottom line
Until the recession leaves its ghosts behind and consumer spending shows an upward trend, the scene looks pretty good for companies dealing in used vehicles. This is especially true while Japan's auto industry remains in the dumps.
