Analysts weigh in on Harvey impact on used car market

Hurricane Harvey has left a path of destruction in Texas. Commenting on the potential impact the storm will have on the used car market, Janney Capital analyst John Rowan argued that non-bank financials that cater to consumers lower in the credit bureau score spectrum are at an advantage, while his peer at Craig-Hallum sees Carvana (CVNA) as a potential prime beneficiary post-Harvey.

SUBPRIME FINANCING

Janney Capital analyst John Rowan told investors that a new report by Cox Automotive claims that up to half a million cars will be scrapped as a result of Hurricane Harvey, which if accurate would be a significant event for the used car market that could go a long way toward removing the increased wholesale supply of used vehicles and could lead to better pricing later in the year.

While some percentage of the damaged vehicles will be replaced with new ones, Rowan thinks most will be replaced with a used vehicle.

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Speculating on who could benefit the most in such a scenario, the analyst argued that non-bank financials that cater to consumers lower in the credit bureau score spectrum are at a “disproportionate advantage.”

The demographic data of the Houston metro area skews toward a greater concentration of un/under-banked consumers, he noted.

Companies that specialize in subprime automotive financing include Ally Financial (ALLY), America’s Car-Mart (CRMT), OneMain Holdings (OMF) and Santander Consumer (SC).

CARVANA MAY BENEFIT

In a research note of his own, Craig-Hallum analyst Steven #Dyer said that while he is cognizant of the near-term disruption in auto sales as a result of Hurricane Harvey, he expects investors will begin looking for beneficiaries from the associated replacement sales. With estimates of more than 500,000 vehicles to be scrapped, the analyst is expecting a surge in replacement sales over the coming months, which is likely to benefit automotive dealers in the associated areas impacted by Harvey.

In his universe, Dyer believes #Carvana (CVNA) could be the prime beneficiary. The company has been in the Houston market since the fourth quarter of 2015 but keeps little-to-no inventory onsite, has about 7,500 vehicles in inventory at any given time and its largest reconditioning center is just up the road in Dallas, the analyst highlighted.

Furthermore, Dyer believes the company’s proven and successful delivery and logistics strategy could allow them to benefit disproportionately from replacement sales. He reiterated a Buy rating and a $24 price target on Carvana’s shares.

COPART

Copart, Inc. (CPRT) is the leading junk car yard or used autoparts. It offers a range of services for processing and selling vehicles over the Internet through its Virtual Bidding Third Generation Internet auction-style sales technology to vehicle sellers, primarily insurance companies, as well as to banks and financial institutions, charities, car dealerships, municipalities, fleet operators, and vehicle rental companies.

PRICE ACTION

In Thursday’s trading, shares of Ally Financial, America’s Car-Mart and OneMain Holdings are all up about 1%, while Santander Consumer’s stock is slipping almost 0.5%. Shares of Carvana have gained over 4%. Its services also comprise services to sell vehicles through CashForCars.com; and U-Pull-It service that allows buyer to remove valuable parts, and sell the remaining parts and car body.

CPRT is up 14 cents to $32.01.

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This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility.