Analysts think this ASX auto share could be turning the corner

Here's why analysts think the AP Eagers Ltd (ASX: APE) share price could be turning the corner in 2020 and beyond.

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Recently, analysts from respected broker Bell Potter released a research note on automotive retailer AP Eagers Ltd (ASX: APE). Here's why analysts think the company's share price could be turning the corner in 2020 and beyond.

COVID-19 pandemic could see boom in new car sales

AP Eagers is Australia's oldest listed automotive retail group, operating dealerships across the country. Despite its huge presence, AP Eagers has faced multiple headwinds in recent times with the auto sector struggling to gain traction.

New vehicle sales in Australia have been in a spiralling decline, recording 25 consecutive months of lower sales. The COVID-19 pandemic has accelerated the industry's decline, with lockdown restrictions hampering demand. Despite the doom and gloom, analysts are optimistic that new car sales could receive a massive boost.

According to analysts, the aftermath of the COVID-19 pandemic could see new car sales receive a much-needed boost as the public avoid taking public transport. This shift in consumer behaviour was recently reflected in China, where new vehicle sales increased on a weekly basis.

How has AP Eagers responded to the pandemic?

The AP Eagers share price has bounced more than 120% from its low in late March. The company released an update in late April informing shareholders that its dealerships remained operational. Management also elaborated that the COVID-19 pandemic has allowed the company to reduce its cost base and reshape its business.

AP Eagers also secured an additional $122 million in working capital that has put the company in a better position than its smaller competitors. As a result, the current pandemic could provide AP Eagers with the opportunity to buy distressed dealerships and improve the company's overall liquidity.

Should you buy?

Analysts are bullish on the outlook for AP Eagers, slapping a $6.50 price target on the company's share price. AP Eagers has many positives going for it, with the asset-rich company acquiring market leader Automotive Holdings Group in 2019. In addition, AP Eagers was added to the S&P/ASX 200 Index (ASX: XJO) in the December 2019 quarterly rebalance, which could see increased demand from index funds.

In my opinion, the hypothesis of changed consumer behaviour post-pandemic is interesting. China, however, may not be the best lead indicator of future performance of new car sales in Australia. Chinese consumers have greater incentives and subsidies when it comes to buying new cars.

As a result, I think a prudent strategy for investors would be to keep ASX auto shares like AP Eagers and Ltd (ASX: CAR) on a watchlist so that they may capitalise if the narrative eventuates.   

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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