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Used Cars Keeping Pace in New-Car Boom

18 July 2014 in Trading Ideas

The average age of the American car may have peaked – but it’s not getting any younger anytime soon.

According to an annual study by automotive research firm IHS Automotive, the average age of cars on US roads has held steady for two consecutive years at 11.4 years – following a period after the post-financial crisis in which the age of vehicles grew rapidly.1

“In our history of tracking, we have seen a gradual increase in the average age of vehicles on the road,” said Mark Seng, an analyst at IHS Automotive, said in the study. “This year, we’re seeing somewhat of a plateau in the market, and expect it to remain over the next few years, without a major change in either direction. We attribute this to a number of factors, including the economy and the increasing quality of today’s automobiles.”

 

IHS forecasts that the average age of vehicles will remain about the same through 2015, then rise to 11.5 years by 2017 and 11.7 years by 2019.

Meanwhile, the number of vehicles hauled to the junkyard last year — a statistic known as the “scrappage rate” — fell to just over 11.5 million vehicles scrapped during the 12-month period examined by IHS Automotive. In comparison, a record number of more than 14 million vehicles were scrapped in 2012.

This trend in used cars hasn’t seemed to diminish, even though the market for new car sales appears to be rebounding.

As the Wall Street Journal reported earlier this month, low interest rates and a brighter economic outlook drove new-vehicle sales higher for most major auto makers in June, allaying worries of a market slowdown and setting the industry up for a strong second half.2

Industrywide auto sales rose 1.2% to 1.4 million in June, pushing the annualized selling rate to 16.98 million, its highest pace since July 2006, according to market research firm, Autodata Corp, the Journal said.

For the first half of the year, auto makers sold a total of 8.2 million vehicles in the U.S., up 4.3% over the same year-ago period.

America’s dependency on its used-car fleet also has seemed to contribute to the healthier bottom lines and stock prices of parts retailers and auto dealers. The Used Car Tune-up motif has risen 24.4% in the past 12 months. During that same period, the S&P 500 has advanced 19.7%.

Over the past month, the motif has increased 3.5%; the S&P 500 is up 2%.

Demand also was illustrated by the recent quarterly results by car purveyor CarMax, which saw its stock soar last month after its quarterly profit and revenue beat Wall Street estimates.3

The company said used-car revenue jumped 13% in its most recent fiscal first quarter.

With demand seemingly holding up amid sustained low interest rates, investors in used-car stocks and ETFs are hoping to enjoy the ride for a while longer.

1Jerry Hirsch, “253 million cars and trucks on U.S. roads; average age is 11.4 years,” latimes.com, June 9, 2014, http://www.latimes.com/business/autos/la-fi-hy-ihs-automotive-average-age-car-20140609-story.html, (accessed July 16, 2014).

2Christina Rogers, “U.S. June Auto Sales Keep Climbing,” wsj.com, July 1, 2016.

3Niamh Ring, “CarMax Soars as Earnings, Revenues Top Analyst Estimates,” Bloomberg.com, June 20, 2014, http://www.bloomberg.com/news/2014-06-20/carmax-soars-as-earnings-revenues-top-analyst-estimates.html, (accessed July 16, 2014).

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