Are auto lenders worth a look?

A look at Ally and Credit Acceptance Corp (CACC)

Auto lenders deserve some scrutiny here, at this point of the macro cycle. The US market has experienced its fair share of turmoil with the auto industry. Supply chain pressures and the lack of chips left the auto sector distraught. New cars were not available and used car prices soared.

Amid this backdrop, the auto lenders still fared quite well as there was a surge in used car prices and drove the size of loans. Not only that, used car loans tend to have higher rates of interest and consequently make more money for the companies.

Since then, used car prices have come down significantly but, given that interest rates have increased rapidly, the companies have still made money at the net interest margin level, quite like the banks.

Ally reported last Friday and they beat both revenue estimates and earnings estimates. Piper Sandler gave them an upgrade from Underweight to Neutral and the Motley Fool calls them cheap on a P/E basis, both on January 09, 2023.

The market seems to agree, as shares of ALLY 0.00%↑ soared on earnings.

The other major auto financier - Credit Acceptance Corp CACC 0.00%↑ - also soared in sympathy.

The market seems to be content on ignoring the macro and the fundamentals these days. Calling something cheap on P/E basis doesn’t work in slowdown or a recession, if the “E” in P/E is going to decline. There’s no denying that we will see earnings decline for companies and it behooves us to be cautious.

We’re about to face a very challenging macro backdrop for these companies and unlike the Piper Sandler, I don’t think it’s all priced in, and I don’t think it’s time to buy these companies, just yet.

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