Earlier this week, Australian car enthusiasts were left disheartened when Holden’s parent company General Motors announced the axing of the brand. The company cited low monthly sales over 72 years as the reasoning for axing the iconic Australian car brand.
The Holden brand operated in Australia for 164 years and played a huge role in shaping the country’s motoring industry. So, what does the demise of Holden mean for ASX stocks in the automotive sector?
How has the automotive sector performed in general?
Australian new car sales have been in a downturn for 20 consecutive months, with many dealers citing weak consumer confidence and tighter lending as contributing factors.
Despite the retirement of the Holden brand, some analysts are optimistic that the fall in the automotive sector could be bottoming and begin to reflect the recovery in property prices.
With this, here are 2 ASX automotive shares to keep an eye on:
AP Eagers Ltd (ASX: APE)
As Australia’s oldest listed automotive retail group, AP Eagers operates dealerships across the country. The company provided an update to the market recently regarding the retirement of the Holden brand.
AP Eagers has been a loyal partner with General Motors for over 90 years. As a result, management is optimistic that Holden’s parent company will deal with the transition fairly as they look to compensate car sellers. In relation to the overall effect on AP Eagers, management indicated that it is too early to estimate the full financial impact.
AP Eagers acquired market leader Automotive Holdings Group (AHG) in 2019, which could boost the company’s overall profitability. However, the AP Eagers share price has come under pressure over the past 3 months following a profit warning and the underpayment of employees.
Carsales.Com Ltd (ASX: CAR)
Carsales could potentially be another company to watch in the long term as the Holden brand retires.
Classic Holden cards such as the 1977 Torana and Monaro GTC and other models that come from a limited edition lineage could be expected to fetch higher prices on the second-hand car market. As a result, operators like Carsales could benefit if there is an increase in listings and demand.
Unlike AP Eagers, Carsales has been able to buck the trend of a weak automotive market. The company’s share price is currently trading near all-time highs after surging more than 60% in 2019.
Carsales has managed to flourish in a tough trading market by operating a competitive business model and increasing its exposure to global markets.
It is important to note that the automotive sector is extremely cyclical and faces numerous challenges. Although the sale of new Holden cars will be axed by 2021, service outlets will continue to operate for a further 10 years. As a result, the market will be able to adjust to the transition gradually.
The demise of Holden does not have to spell doom and gloom for the rest of the sector. Contrarian investors could start to become more bullish over the long term, especially if the government scraps Australia’s luxury car tax.
In my opinion, a prudent strategy would be for investors to keep these companies on a watchlist and wait for positive price action and sentiment before making an investment decision.
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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com 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.