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The struggling auto sector could be bottoming. Should you invest in 2020?

The downturn in new car sales across Australia reached 20 consecutive months in 2019.  Many car dealers have cited weak consumer confidence and tighter lending by banks and financiers as the contributing factors.

However, despite dropping 3.8% overall in December, new vehicle sales jumped in New South Wales that month, which is the country’s biggest selling state. Analysts are optimistic that the auto sector could be bottoming to reflect the strong recovery seen in property prices last year.

So, here are 2 ASX shares to watch for a recovery in the auto sector.  

AP Eagers Ltd (ASX: APE)

AP Eagers is Australia’s oldest listed automotive retail group, operating dealerships across the country. The AP Eagers share price more than doubled in 2019, hitting an all-time high of $14.49. However, the company’s share price came under pressure in early November after AP Eagers released an announcement to the market, warning that external conditions continue to make the automotive retail sector challenging.

The asset-rich company also acquired market leader Automotive Holdings Group (AHG) in 2019. Management from AP Eagers believe that the progressive integration of AHG could result in a $4.8 million contribution to the company’s underlying operating profit.

In addition, AP Eagers was added to the S&P/ASX 200 (INDEXASX: XJO) in the December quarterly rebalance. The company’s addition could see shares in AP Eagers come under more demand as index funds swoop in.   

Carsales.Com Ltd (ASX: CAR)

The Carsales share price has also shrugged off a weak auto market, with the company’s share price closing 60% higher in 2019. The Carsales share price is currently trading near all-time highs, reflecting the company’s dominant position in Australia. Carsales has managed to flourish in a tough trading market by exploiting a competitive business model and gaining increasing exposure to global markets.

Carsales reported that group revenue for FY19 was up 11% to $418 million and earnings before interest, tax, depreciation and amortisation (EBITDA) was up 7% to $210 million. In the domestic market, Carsales highlighted robust revenue improvements in its private advertising segments. Carsales also saw strong international growth, which has helped the company tread a tough domestic environment. For FY19, Carsales reported double-digit underlying revenue, with a 29% increase in EBITDA. Brazil, Chile and Mexico were highlighted as countries the company aims to target for further expansion.

Should you buy?

The automotive sales sector is extremely cyclical. After being in decline for 20 consecutive months, many contrarian investors would start to become more bullish given the recovery in other sectors in 2019.

In my opinion, AP Eagers would be first choice in this sector, because the company’s acquisition of AHG provides it with exposure to a further 27 car and 10 truck/bus brands. Also, its addition to the ASX 200 could be an indicator of the company’s long-term prospects.

Although Carsales is a proven performer, the company could be facing stronger local competition in the near future. Late last year, eBay-owned Gumtree acquired Carsguide and Autotrader in an effort to challenge Carsales as a market leader.

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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