BofA update shows where active managers are putting money
Investing.com -- JP Morgan warned of a challenging second half for U.S. franchise auto dealers as rising inventory, softening demand and tariffs weigh on the industry, prompting the bank to downgrade several dealer stocks like Group 1 Automotive (NYSE:GPI), Sonic Automotive (NYSE:SAH) and Asbury (NYSE:ABG) Automotive.
Despite a likely round of second-quarter earnings beats, JP Morgan said fundamentals have weakened, and dealer stocks have disconnected from underlying trends.
Shares have outperformed broader retail benchmarks even as early signs of margin pressure and slower sales growth have emerged.
"This is the first instance since the pandemic where we believe shares seem to have disconnected from fundamentals," the analysts wrote, citing growing risks to vehicle margins and limited room for further upside in valuations.
JPMorgan cut its ratings on Group 1 to Neutral from Overweight, Sonic to Underweight from Overweight, and Asbury to Underweight from Neutral.
The analysts now see roughly 10% downside for the group on average, with few near-term catalysts to support earnings growth.
While parts and service revenue is expected to remain a steady contributor, comparisons get tougher through the rest of the year, especially as elevated recall-related activity fades.
New vehicle supply continues to rise, but demand is showing signs of strain, pressuring pricing and profit per unit.
The bank maintained its only Overweight rating in the group on Lithia Motors (NYSE:LAD), citing stronger growth drivers and capital flexibility.
JP Morgan sees better positioning for B2C marketplaces like Cars.com, which it upgraded to Overweight, saying the segment offers more resilient revenue and favorable valuation after lagging dealer stocks this year.
The note also flagged ongoing risks for B2B marketplaces tied to declining off-lease volumes and fewer trade-ins, which have weakened wholesale activity in recent months.