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Are ASX auto shares a long-term buy?

The auto sector is naturally a very cyclical industry. Before the COVID-19 pandemic, new car sales in Australia were in decline, reporting 20 consecutive months of declining sales. But despite the subdued consumer confidence and tighter lending regulations, some analysts were optimistic on the industry’s outlook.

The coronavirus crisis has thrown a spanner in the works with regards to a recovery in the auto sector. Despite the setback, ASX auto shares could be a long-term buy as lenders loosen their restrictions and growth emerges from new areas.

Coronavirus slashes new car sales

Early last week, a members survey by Motor Trades Association (MTAA) found that new car sales in Australia crashed by more than 60% in the space of a week. The survey also found a sharp drop in car-servicing cancellations and in new finance contracts since the 16 March.

The survey cited that social distancing and isolation measures to combat the pandemic were influencing customers to stay away from dealerships. In response, the industry is calling for assistance from banks and lending institutions to reignite demand.  

Analysts downgrade

Recently, equity analysts from UBS cut profit forecasts for Ltd (ASX: CAR) due to the impact of the COVID-19 pandemic. Carsales made a decision to waive all fixed and variable advertising fees for dealers through April 2020 in order to reduce their short-term operating costs.

As a result, analysts forecast that the decision will result in lower revenues for the company. Analysts also cited a fall in volume in cars for sale and consumer participation due to isolation requirements. Despite the gloomy forecast, analysts are optimistic on the international growth outlook for Carsales with growth remaining intact, especially in South Korea.

The broker forecasts that CarSales will be forced to cut its first half dividend for FY21, and that its net debt to EBITDA ratio will rise. As a result, analysts slashed the 12-month price target for Carsales by 20% to $12.50 from $15.65.

How has Carsales responded to the pandemic?

Carsales addressed the impact of COVID-19 on its earnings in an update to the ASX last month. Given the fluid nature of the pandemic, Carsales was not able to predict the full impact and withdrew its outlook and guidance for FY20.

Despite the continued uncertainty in the Australian market, Carsales reassured investors that operational metrics in its international markets remain robust. The company also addressed its strong balance sheet and gearing will allow the company to deal with the challenging conditions.

Should you buy?

The challenging market conditions have been reflected in the share price of Carsales and automotive retail group AP Eagers Ltd (ASX: APE). At the time of writing, shares in Carsales are down 37% from their February high, whilst the AP Eagers share price is down more than 66% since February.

It is important to note that the exit of Holden from the Australian auto market could play a role in the declining figures. Despite the gloomy outlook, relaxed restrictions from banks and lenders could boost the subdued demand. As a result, stocks in the auto sector could potentially find a bottom with the market in the next few months. A prudent strategy would be to wait for share price consolidation 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 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.