CarMax, Inc (KMX), AutoNation, Inc. (AN): Why You Should Play The Auto Sector A Little More Aggressively

Alternatives: used cars, part suppliers, and auto manufacturers.

As I mentioned before, CarMax, Inc (NYSE:KMX) is a much less recession prone option. I discuss CarMax’s revenue growth extensively in the article I wrote a few weeks ago, but the company’s sales barely suffered during the recession and have since increased to about 40% more than they were before the economy soured. However, bear in mind that CarMax, Inc (NYSE:KMX) trades at around 25 times earnings. In other words, you pay for their tremendous growth.

Another way to play the sector that is relatively recession-proof is through auto parts retailers such as AutoZone, Inc. (NYSE:AZO). AutoZone actually benefits if both AutoNation and CarMax, Inc (NYSE:KMX) do badly, as that would imply that consumers are hanging on to their aging cars for longer, as was the case a few years ago. An aging vehicle population means a lot more repair parts are needed. To further illustrate this point, consider that AutoZone’s sales increased every single year over the past decade, whether the economy was strong or not.

Finally, the most bullish way to play the sector is with an investment in one of the automakers themselves, such as Ford Motor Company (NYSE:F). Ford’s sales are more reactive to the economic climate than the other alternatives discussed here, and plummeted 31.4% between 2007 and 2009. While Ford’s sales have rebounded in recent years, consider that the company’s U.S. market share has been falling lately, down from 11.9% to 10.5% in the last year alone. There are several other choices like Toyota (low risk) and General Motors (high risk), but regardless of which one you choose, realize that this is the most bullish way to play the sector.

Conclusion

After examining several options, I think that AutoNation, Inc. (NYSE:AN) is an excellent combination of bullishness and defensiveness. On the bullish side, the company makes the majority of its money from new vehicles sales. They also have significant exposure to used vehicle sales and repair, which combine for over 40% of the company’s revenue and offer some protection in challenging times.

The article Why You Should Play The Auto Sector A Little More Aggressively originally appeared on Fool.com and is written by Matthew Frankel.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends CarMax and Ford. The Motley Fool owns shares of Ford. Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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